@Jete062
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑ | ANNUAL REPORT |
For the fiscal year ended December 31, 20172020
☐ | TRANSITION REPORT |
For the transition period from to
Commission file number: 000-30653
Galaxy Gaming, Inc.
(Exact name of registrantsmall business issuer as specified in its charter)
Nevada |
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(State or other jurisdiction of incorporation or organization) |
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(Address of principal executive offices) |
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(702) 939-3254 | ||||
(Registrant’s telephone |
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
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Common stock | GLXZ | OTCQB marketplace |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the issuer has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ☐ No ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☑Emerging growth Company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
If an emerging growth company, indicate by check mark ifState the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s second fiscal quarter was $9,089,180. Sharesquarter. $21,069,348.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, held by each officer and each person known to the registrant to own 10% or moreas of the outstanding voting securitieslatest practicable date: 21,970,638 common shares as of the registrant were excluded in that such persons may be deemed to be affiliates. This determination of affiliation status is not a determination for other purposes. The registrant has one class of securities, its common stock.
As of April 2, 2018, the registrant had 39,765,591 shares of common stock outstanding.
March 26, 2021.
GALAXY GAMING, INC.
ANNUALANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 20172020
TABLE OF CONTENTS
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PART I | ||||
Item 1. |
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Item 1A. |
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Item 1B. |
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Item 2. |
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Item 3. |
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Item 4. |
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PART II | ||||
Item 5. |
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Item 6. |
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Item 7. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
| Quantitative and Qualitative Disclosures |
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Item 8. |
| Financial Statements and Supplementary |
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Item 9. |
| Changes |
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Item 9A. |
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Item 9B. |
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PART III | ||||
Item 10. |
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Item 11. |
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Item 12. |
| Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters |
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Item 13. |
| Certain Relationships and Related Transactions, and Director Independence |
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Item 14. |
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PART IV | ||||
Item 15. |
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Unless the context indicates otherwise, references to “Galaxy Gaming,” “we,” “us,” “our” or the “Company,” refer to Galaxy Gaming, Inc., a Nevada corporation, the company filing this report.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that do not relate to historical or current facts but are “forward-looking” statements. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to future events or trends, our future prospects and proposed new products, services, developments or business strategies, among other things. These statements can generally (although not always) be identified by their use of terms and phrases such as anticipate, appear, believe, could, would, estimate, expect, indicate, intent, may, plan, predict, project, pursue, will continue and other similar terms and phrases, as well as the use of the future tense.
Actual results could differ materially from those expressed or implied in our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent known and unknown risks and uncertainties. You should not assume at any point in the future that the forward-looking statements in this report are still valid. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances.
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PART I
BUSINESS
Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refer to Galaxy Gaming, Inc., a Nevada corporation (“Galaxy Gaming”).
We are an established global gaming company specializing in the design, development, manufacturing,acquisition, assembly, marketing and acquisitionlicensing of proprietary casino table games and associated technology, platforms and systems for the casino gaming industry. Our products and services are designed to enhance the player’s experience and increase the profitability of our clients and include the design, development, manufacture and acquisition of proprietary table games and associated technology, platforms, systems, expert consultation and other services.
History and Development of Galaxy Gaming
In 1997, Galaxy Gaming Corporation (“GGCORP”) was formed and distributed a side bet for the game of blackjack known as Horseshoe Blackjack. GGCORP later modified the invention, changed its name to Lucky Ladies and filed for a patent, which was later granted.
In 2002, Galaxy Gaming, LLC (“GGLLC”) acquired the business and assets of GGCORP. Lucky Ladies remained GGLLC’s only product until late 2002, when it debuted a new casino poker game called Texas Shootout. This game quickly became popular with casinos and their customers. GGLLC later increased its sales force, expanded its distribution channels and introduced new products and services using reinvested earnings.
Galaxy Gaming, Inc. (“GGINC”) was formed in 2006 and subsequently acquired the assets and business operations of GGLLC.
In 2009, GGINC executed a share exchange and reverse merger with Secured Diversified Investment, Ltd. (“SDI”). After the reverse merger, SDI merged with its wholly-owned subsidiary, GGINC, pursuant to Nevada Revised Statutes 92A.180 and changed the name of the company formerly known as SDI to “Galaxy Gaming, Inc.” which remains the operating company as of the date of this report.
Products and Services
Casinos use our proprietary products and services to enhance their gaming floor operations and improve their profitability, productivity and security, as well as to offer popular cutting-edge gaming entertainment content and technology to their players. We market our products and services to online casinos worldwide and to land-based riverboat, cruise ship and internetcasino gaming companies located in North America, the Caribbean, Central America, the British Isles,United Kingdom, Europe and Africa and to cruise ships and internet gaming sites worldwide.ship companies. We currently serve over 600 casinos that use our enhancements on approximately 6,000 gaming tables. Additional information regardinglicense our products and services may be found on our website, www.galaxygaming.com. Information found on the website should not be considered part of this report.for use solely in legalized gaming markets.
Proprietary Table Games. Casinos use Proprietary Table Games together with or in lieu of thoseother games in the public domain (e.g. Blackjack, Craps, Roulette, etc.) because of their popularity with players and to increase profitability. Typically, Proprietary Table Games are grouped into two product types referred to as “Side Bets” and “Premium Games.” Side Bets are proprietary features and wagering schemesoptions typically added to public domain games such as poker, baccarat, pai gow poker, craps and blackjack table games. Examples of our Side Bets include 21+3, Lucky Ladies, 21+3 and Bonus Craps. Premium Games are unique stand-alone games with their own unique set of rules and strategies. Examples of our Premium Games include Heads Up Hold ’em, High Card Flush,, Cajun Stud and Three Card Poker and Texas Shootout. Generally, Premium Games generate higher revenue per table placement than the Side Bet games. At December 31, 2020, our games were being played on 5,073 tables in 586 physical casinos in the markets listed above.
Enhanced Table Systems. Enhanced Table Systems are electronic enhancements used on casino table games to add to player appeal and to enhance game security. An example in this category is our Bonus Jackpot System (“BJS”), an advanced electronic system installed on gaming tables designed to collect data by detecting player wagers and other game activities. This information is processed and used to improve casino operations by evaluating game play, to improve dealer efficiency and to reward players through the offering of jackpots and other bonusing mechanisms. Typically, the BJS system includes an electronic video display, known as TableVision, which shows game information designed to generate player interest and to promote various aspects of the game. The BJS system iscan also be used to network numerous gaming tables together into a common system either within a casino or through the interconnection of multiple casinos, which we refer to as our Inter-Casino JackpotLink System.
e-Tables. In 2011,iGaming. On August 21, 2020, we entered into a licensing agreement (the “TMAX Agreement”) with TableMAX Corporation (“TMAX”), a providercompleted the acquisition of electronic table games and platforms headquartered100% of the member interests in Las Vegas, Nevada, and obtainedProgressive Games Partners, LLC (“PGP”). PGP holds the exclusive worldwide rights (excluding one international territoryto a number of games titles (including ours) for relicensing to operators of online gaming systems principally in Europe, the United Kingdom, and, two U.S. states)more recently, the United States. Prior to the TableMAX e-Table system and certain related game titles. The TableMAX e-Table system is a fully automated, dealer-less, multi-player electronic table game platform. Effective December 29, 2017, we entered into a First Amendmentacquisition, PGP had been the exclusive distributor of our games to the TMAX Agreement (the First Amendment”) to, amongonline gaming sector; by making the acquisition of PGP, we effectively eliminated the distributor fee that PGP charged us and we now also receive the revenue PGP earns on the content of other things, allow us to retain all net profits generated after the date of the First Amendment and terminate the TMAX Agreement effective upon the earliest of (1)licensors (to whom we pay a royalty fee). At December 31, 2019; (2) termination2020, PGP had contracts to license 14 games from 8 licensors, as well as our own content, and had contracts with 16 online operators for the use of game placements at the remaining TableMax clients; or (3) regulatory approval received by
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TMAX to service the remaining clients independently. The parties also executed a related settlement and release agreement (the “Settlement and Release Agreement”).that content. In January 2018, in connectionmany cases, these online operators provide “white label” gaming infrastructure for many separate online casino brands with the First Amendment andresult that the Settlement and Release Agreement, we paidcontent that PGP licenses can appear on hundreds of online gaming sites. PGP’s contracts with online operators prohibit those operators from deploying the previously accrued amount of $774,645content in markets where it is not legal to an assignee of TMAX.do so.
Significant 2017 Business Developments
On May 1, 2017, Harry C. Hagerty was appointed as our Secretary, Treasurer and Chief Financial Officer. On July 24, 2017, Robert B. Saucier resigned from his positions as Chairman of the Board of Directors (the “Board”), Chief Executive Officer (“CEO”) and President in order to aid us in our expanded regulatory jurisdictional ambitions. Effective July 24, 2017, the Board appointed Todd P. Cravens to serve as President and CEO. On July 26, 2017, the Board appointed Mark A. Lipparelli as a member of the Board to fill a newly-created board seat and elected Mr. Lipparelli to serve as Chairman of the Board. See Note 2 to our audited financial statements included in Item 8. “Financial Statements and Supplementary Data” for more detail.
Recurring Revenue &and Gross MarginsProfit
TheA majority of our clients contract with us to use our products and services on a month-to-month basis with typically a 30 – 30–45 day termination notice requirement. We invoice our clients monthly, either in advance for unlimited use or in arrears for actual use, depending on the product or contract terms. Such recurring revenues accounted for over 99%substantially all of our total revenues in 20172020 and generally2019. Our license revenues have few direct costs thereby generating high gross profit margins. We do not report “gross profit” in our statements of operations included in this report. Instead, gross profit would be comparable to “revenues” minus “cost of ancillary products and assembled components,” both of which are presented in our statements of operations.
For more information about our revenues, operating income and assets, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data”Financial Information” included in this report.
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STRATEGY
We believe that entertaining casino games will enhance players’ experiences and generate brand loyalty, resulting in increased profits for our casino clients. We continue to expand our product offering by focusing on innovative products and services. As we continue to develop and enhance our brand and reputation, we anticipate adding to new product lines and services that complement our overall strategy and enhance our market presence.
Our long-term business strategy focuses on increasing our value to casino clients by offering them enhanced services and support, and by producing innovative products and game play methodologies that their players enjoy. We believe that by increasing the value of our products and services to clients, we can continue to build our recurring revenues in both existing and new markets. To achieve this objective, we employ the following strategies:
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Expand our portfolio of services, products and technologies;
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Increase our per unit revenues by leveraging our Enhanced Table Systems;
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Expand the number of markets we serve;
Grow our iGaming content and partner base.
Expand our inventoryportfolio of services, products and technologies. Our strategy is to be an important vendor to casino operators by offering a complete and comprehensive portfolio of services, games, products, systems, technologies and methodologies for casino table games. We continuously develop and/or seek to acquire new proprietary table games to complement our existing offerings and to extend our penetration of proprietary table games on the casino floor.
Increase our revenue per unit price point by leveraging our Enhanced Table Systems. Our Enhanced Table Systems provide us with the opportunity to increase the amount of recurring revenueare placed on tables where we receive from each tablealready have our side bet or premium game placement. Accordingly, our goal is to concentrate on installing new game placements using one or more ofcontent deployed. By adding our Enhanced Table Systems, and to convert our existing Proprietary Table Game placementswe significantly increase the revenue we earn from that currently do not incorporate ourtable. Gaming operators deploy the Enhanced Table Systems. We have modified mostSystems because they generally increase the win for the casino by an amount that significantly exceeds the cost to license the system from us. Our product strategy includes making Electronic Table Systems that support a multitude of our Premium Table Gamesside bets and many of our Side Bets to benefit from the economics this new system affords us. In the future, we intend to be able to offer this platform for all games.premium games across several casino game segments (e.g., blackjack, craps, roulette, baccarat, etc.).
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Expand the number of markets we serve. There are table games markets in North America that we do not serve or in which we cannot offer our full suite of products and services. In general, this is because we are not licensed to serve casinos in that market or the license we have limits the products and services we can provide. Consequently, we are seeking to increase the number of jurisdictions in which we are licensed and to upgrade those licenses that limit our product and service offering. We intend to expandbelieve that the redemption transaction we undertook in 2019 (discussed below in the “Significant 2019 Business Developments” section) will help us with our licensing activities in new markets, including table games markets outside of North America. Finally, we aim to expand by offeringthe United States.
Grow our productsiGaming content and services in markets beyond traditional table games. To this end, wepartner base. We have been active in deploying our game content into the legal on-line gaming market as well as makinglicensed our content available on electronic gaming machines.to the iGaming segment for several years through our distributor, PGP. In 2020, we acquired PGP in order to improve our financial results from the iGaming segment by eliminating the distribution fee to PGP and by adding the revenue that PGP earns from licensing the content owned by itself and others. The COVID pandemic has resulted in a significant increase in jurisdictions considering legalizing iGaming, in many cases in concert with legalizing sports wagering. We intend to increase our revenues from iGaming in several ways. First, we expect that our existing licensees will see growth in their current markets while adding new markets in the U.S. and elsewhere. Second, we intend to add new licensees in the iGaming segment. And finally, we intend to add to the number of games that we license to both existing and new licensees.
COMPETITION
We compete with several companies that develop and provide proprietary table games, electronic gaming platforms, game enhancements and related services. We believe that the principal competitive factors in our market include products and services that appeal to casinos and players, jurisdictional approvals and a well-developed sales and distribution network.
We believe that our success will depend upon our ability to remain competitive in our field. Competition can be based on price, brand recognition, player appeal and the strength of underlying intellectual property.property and superior customer service. Larger competitors may have longer operating histories, greater brand recognition, more firmly established supply relationships, superior capital resources, distribution and product inventory than we do. Smaller competitors may be more able to participate in developing and marketing table games, compared to other gaming products, because of the lower cost and complexity associated with the development of these products and a generally less stringent regulatory environment. We compete with others in efforts to obtain or create innovative products, obtain financing, acquire other gaming companies, and license and distribute products. We compete on these bases, as well as on the strength of our sales, service and distribution channels.
Our competitors include, but are not limited to, Scientific Games Corporation; Play AGS, Inc.; TCS/John Huxley; and Masque Publishing. Moreover,Most of these competitors are larger than we are, have more financial resources than we do, and have more business segments than we do. In addition, we expect additional competitors to emerge in the future. There can be no assurances that we will be able to compete effectively in the future and failure to compete successfully in the market could have a material adverse effect on our business.
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SUPPLIERS
We own outright the content for most of our Side Bets and Premium Games and therefore do not depend on suppliers for the majority of our revenues from these games. However, there are some games that we have licensed from others and to whom we pay royalty fees when we license those games to others (including in the online gaming sector).We generally have multi-year licensing agreements for this content. With respect to our Enhanced Table Systems, we obtain most of the parts for our products from third party suppliers, including both off-the-shelf items as well as components manufactured to our specifications. We also manufactureassemble a small number of parts in-house that are used both for product assembly and for servicing existing products. We generally perform warehousing, quality control, final assembly and shipping functions from our facilities in Las Vegas, Nevada, although small inventories are maintained, and repairs are performed by our field service employees. We believe that our sources of supply for components and raw materials are adequate and that alternative sources of materials are available.
RESEARCH AND DEVELOPMENT
We striveseek to develop and maintain a robust pipeline of new products and services to bring to market. We employ a staff of hardware and software engineers, graphic artists and game developers at our corporate offices to support, improve and upgrade our products and to develop and explore other potential table game products, technologies, methodologies and services. We also will use contracted third party developers and engineers.
We incurred $488,829 and $353,816 inoutside services for research and development expenditures during 2017 and 2016, respectively. Consistent with our increased focus on development of new product and services, we anticipate significant increases in research and development expenditures in 2018.from time to time.
INTELLECTUAL PROPERTY
Our products and the intellectual property associated with them are typically protected by patents, trademarks, copyrights and non-compete agreements. However, there can be no assurance that the steps we have taken to protect our intellectual property will be sufficient. Further, in the United States certain court rulings may make it difficult to enforce patents around the math relating to casino games, which makes us more dependent on copyrights and trademarks for protection. In addition, the laws of some foreign countries do not protect intellectual property to the same extent as the laws of the United States, which could increase the likelihood of infringement. Furthermore, other companies could develop similar or superior products without violating our intellectual property rights. If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome, disruptive and expensive, and distract the attention of management, and there can be no assurance that we would prevail.
We have been subject to litigation claiming that we have infringed the rights of others and/or that certain of our patents and other intellectual property are invalid or unenforceable. We have also brought actions against others to protect our rights. See “Item 3. Legal Proceedings” and Note 11 of our audited financial statements included in our annual report on Form 10-K for the fiscal year ended December 31, 2016.
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We are subject to regulation by governmental authorities in most jurisdictions in which we offer our products. The manufacturingdevelopment and distribution of casino games, gaming equipment, systems technology and related services, as well as the operation of casinos, are all subject to regulation by a variety of federal, state, international, tribal, and local agencies with the majority of oversight provided by individual state gaming control boards. While the regulatory requirements vary by jurisdiction, most require:
Findings of suitability for the company,Company, individual officers, directors, key employees and major shareholders;
Documentation of qualification, including evidence of financial stability;
Specific product approvals for games and gaming equipment manufacturers;equipment; and
Licenses, registrations and/or permits.
Gaming regulatory requirements vary from jurisdiction to jurisdiction, and obtaining licenses, registrations, findings of suitability for our officers, directors, and principal stockholders and other required approvals with respect to us, our personnel and our products are time consuming and expensive. Generally, gaming regulatory authorities have broad discretionary powers and may deny applications for or revoke approvals on any basis they deem reasonable. We have approvals that enable us to conduct our business in numerous jurisdictions, subject in each case to the conditions of the particular approvals. These conditions may include limitations as to the type of game or product we may sell or lease, as well as limitations on the type of facility, such as riverboats, and the territory within which we may operate, such as tribal nations. Gaming laws and regulations serve to protect the public interest and ensure gambling related activity is conducted honestly, competitively and free of corruption. Regulatory oversight additionally ensures that the local authorities receive the appropriate amount of gaming tax revenues. As such, our financial systems and reporting functions must demonstrate high levels of detail and integrity.
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We also have authorizations with certain Native American tribes throughout the United States that have compacts with the states in which their tribal dominions are located or operate or propose to operate casinos. These tribes generally require suppliers of gaming and gaming-related equipment to obtain authorizations. Gaming on Native American lands within the United States is governed by the Federal Indian Gaming Regulatory Act of 1988 (“IGRA”) and specific tribal ordinances and regulations. Class III gaming (table games and slot machines, for example), as defined under IGRA, also requires a Tribal-State Compact, which is a written agreement between a specific tribe and the respective state. This compact authorizes the type of Class III gaming activity and the standards, procedures and controls under which the Class III gaming activity must be conducted. The National Indian Gaming Commission (“NIGC”) has oversight authority over gaming on Native American lands and generally monitors tribal gaming, including the establishment and enforcement of required minimum internal control standards. Each tribe is sovereign and must have a tribal gaming commission or office established to regulate tribal gaming activity to ensure compliance with IGRA, NIGC, and its Tribal-State Compact. We have complied with each of the numerous vendorsvendor licensing, and specific product approvalapprovals and shipping notification requirements imposed by Tribal-State Compacts and enforced by tribal and/or state gaming agencies under IGRA in the Native American lands in which we do business.
The nature of the industry and our worldwide operations make the license application process very time consuming and require extensive resources. We engage legal resources familiar with local customs in certain jurisdictions to assist in keeping us compliant with applicable regulations worldwide. Through this process, we seek to assure both regulators and investors that all our operations maintain the highest levels of integrity and avoid any appearance of impropriety.
We have obtained or applied for all required government licenses, permits, registrations, findings of suitability and approvals necessary to manufacturedevelop and distribute gaming products in all jurisdictions where we directly operate. Although many regulations at each level are similar or overlapping, we must satisfy all conditions individually for each jurisdiction. Additionally, in certain jurisdictions we license and/or lease our products through licensed distributors.distributors authorized to do business in those jurisdictions.
In addition to what may be required of our officers, board members, key employees and substantial interest holders, any of our stakeholders, including but not limited to investors, may be subject to regulatory requests and suitability findings. Failure to comply with regulatory requirements or obtaining a finding of unsuitability by a regulatory body could result in a substantial or total loss of investment.
In the future, we intend to seek the necessary registrations, licenses, approvals, and findings of suitability for us, our products, and our personnel in other jurisdictions throughout the world. However, we may be unable to obtain such necessary items, or if such items are obtained, may be revoked, suspended, or conditioned. In addition, we may be unable to obtain on a timely basis, or to obtain at all, the necessary approvals of our future products as they are developed, even in those jurisdictions in which we already have existing products licensed or approved. If the necessary regulationsregistrations are not sought after or the required approvals not received, we may be prohibited from selling our products in that jurisdiction or may be required to sell our products through other licensed entities at a reduced profit.
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We have 3730 full-time employees, including executive officers, management personnel, accounting personnel, office staff, sales staff, service technicians and research and development personnel. As needed, we also employ part-time and temporary employees and pay for the services of independent contractors.
Significant 2020 Business Developments
Share Redemption. On May 6, 2019, we redeemed all 23,271,667 shares of our common stock held by Triangulum Partners, LLC (“Triangulum”), an entity controlled by Robert B. Saucier (“Saucier”), Galaxy Gaming's founder, and, prior to the redemption, the holder of a majority of our outstanding common stock. Our Articles of Incorporation (the “Articles”) provide that if certain events occur in relation to a stockholder that is required to undergo a gaming suitability review or similar investigative process, we have the option to purchase all or any part of such stockholder’s shares at a price per share that is equal to the average closing share price over the thirty calendar days preceding the purchase. The average closing share price over the thirty calendar days preceding the redemption was $1.68 per share.
The consideration owed to Triangulum for the redemption is $39,096,401 (the “Redemption Consideration Obligation”). See Note 10 to our audited financial statements included in Item 8 “Financial Statements and Supplementary Financial Information” for further details.
There is ongoing litigation between the Company and Triangulum related to the redemption and other matters. See Note 11 to our audited financial statements included in Item 8 “Financial Statements and Supplementary Financial Information” for further details.
Membership Interest Purchase Agreement. On February 25, 2020, Galaxy Gaming entered into a Membership Interest Purchase Agreement, dated February 25, 2020 (the “Purchase Agreement”), between the Company and the membership interest holders of PGP.
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On August 21, 2020, the Company entered into a First Amendment to the Purchase Agreement between the Company and the membership interest holders of PGP. The First Amendment, among other things, fixed the cash portion of the purchase price at $6.425 million and established that the stock portion would be satisfied through the issuance of 3,141,361 shares of the Company’s common stock with a value of $1.27 per share on the date of the acquisition.
On August 21, 2020, the Company completed the acquisition of 100% of the member interests in PGP. The entirety of the purchase price ($10,414,528) has been allocated to customer relationships and is included in Other intangible assets, net, on the Company’s balance sheet. See Note 7 to our audited financial statements included in Item 8 “Financial Statements and Supplementary Financial Information” for further details. The Company also acquired certain receivables and payables in the net amount of $581,885, which was to be remitted to the sellers of PGP as the receivables and payables were settled. As of December 31, 2020, the remaining balance owed to the sellers was $36,663.
COVID-19. On March 11, 2020, the World Health Organization declared a pandemic related to the COVID-19 outbreak, which led to a global health emergency. The public-health impact of the outbreak continues to remain largely unknown and still evolving. The related health crisis could continue to adversely affect the global economy, resulting in continued economic downturn that could impact demand for our products.
On March 17, 2020, the Company announced that it suspended billing to customers who had closed their doors due to the COVID-19 outbreak. As a result, we did not earn revenue for the use of our games by our physical casino customers during the time that they were closed. In general, the online gaming customers who license our games through our distributor remained and continue to remain in operation in spite of the COVID-19 crisis. We earned revenue from them during the crisis and expect to continue to do so, but potentially at levels that may be lower than we previously received.
As of the date of this filing, many land-based casinos have begun to re-open with significantly reduced occupancy and other limitations. As they reopen, it will take additional time for their operations to return to pre-crisis levels. Given the uncertainties around casino re-openings, we instituted a phased billing approach for our clients through fiscal year 2020, which resulted in us realizing substantially less revenue than we might otherwise expect. In addition, because of COVID-19-related financial pressures on our physical casino customers, there can be no assurance that our accounts receivable will be paid timely for revenues earned prior to the shutdowns. Finally, the Company was notified by some of the land-based casinos that they would be extending their payment terms.
We also rely on third-party suppliers and manufacturers in China, many of whom were shut down or severely cut back production during the shutdown. Although this has not had a material effect on our supply chain, any future disruption of our suppliers and their contract manufacturers may impact our sales and operating results going forward.
Because of the uncertainties of COVID-19, the Company drew on its Revolving Loan in the amount of $1,000,000 on March 12, 2020. Also, on April 17, 2020, the Company obtained an unsecured loan of $835,300 through Zions Bancorporation, N.A. dba Nevada State Bank under the Paycheck Protection Program (the “PPP Loan”) pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Paycheck Protection Program Flexibility Act (the “Flexibility Act”). On July 16, 2020, the Company filed an application and supporting documentation for forgiveness in full of the PPP Loan. On November 21, 2020, the Company received notification the PPP Loan had been forgiven in full. Pursuant to the CARES Act, the Federal Reserve created the Main Street Priority Loan Program (“MSPLP”) to provide financing for small and medium-sized businesses. On October 26, 2020, the Company borrowed $4 million from Zions Bancorporation N.A., dba Nevada State Bank under this program. See Note 10 to our audited financial statements included in Item 8 “Financial Statements and Supplementary Financial Information” for further details.
As of the date of this filing, the Company believes that it has adequate liquidity to meet its short-term obligations. If the effects of the COVID-19 crisis endure or there is another period of casino closures, we may be required to reassess our obligations, including our ability to pay employee compensation and benefits.
The COVID-19 crisis may change the behavior of gaming patrons. Most of our clients operate places of public accommodation, and their patrons may reduce visitation and play as a precaution. Further, governmental authorities may continue to impose reduced hours of operation or limit the capacity of such places of public accommodation. A long-term reduction in play could have a material adverse impact on our results of operations. Depending on the length and severity of any such adverse impact, we may fail to comply with our obligations, including covenants in our credit agreement, and we may need to reassess the carrying value of our assets.
Credit Agreement Amendments. See Note 10 to our audited financial statements included in Item 8 “Financial Statements and Supplementary Financial Information” for further details of amendments made to the Company’s credit agreement.
8
A smaller reporting company is not required to provide the information required by this Item.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.A smaller reporting company is not required to provide the information required by this Item.
We do not own any real property used in the operation of our current business. We maintain our corporate office at 6767 Spencer6480 Cameron Street, Suite 305, Las Vegas, Nevada, where we currently occupy approximately 24,00014,000 square feet of combined office and warehouse space and pay approximately $19,000 in monthly rent to a third party pursuant to a lease entered into effective in 2014.space. We also maintain a small warehouse and service facility in Kent, Washington and a small office in Richland, Washington. See Note 119 to our audited financial statements included in Item 8 “Financial Statements and Supplementary Data”Financial Information” for further details.
We have been named in and have brought lawsuits in the normal course of business. A description of these matters is contained inSee Note 11 to our audited financial statements included in Item 8.8 “Financial Statements and Supplementary Financial Information” for further details.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.A smaller reporting company is not required to provide the information required by this Item.
8
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the OTCQB marketplace (“OTCQB”) under the ticker symbol GLXZ.
The following table sets forth the range of high and low closing sale prices for our common stock for each of the periods indicated as reported by the OTCQB.
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||||||||||||||||||
| High ($) |
|
| Low ($) |
|
| High ($) |
|
| Low ($) |
|
| High ($) |
|
| Low ($) |
|
| High ($) |
|
| Low ($) |
| |||||||||
March 31, |
|
| 0.67 |
|
|
| 0.52 |
|
|
| 0.22 |
|
|
| 0.12 |
|
|
| 1.95 |
|
|
| 0.70 |
|
|
| 2.15 |
|
|
| 1.39 |
|
June 30, |
|
| 0.78 |
|
|
| 0.59 |
|
|
| 0.39 |
|
|
| 0.18 |
|
|
| 1.36 |
|
|
| 0.73 |
|
|
| 1.84 |
|
|
| 1.57 |
|
September 30, |
|
| 1.17 |
|
|
| 0.70 |
|
|
| 0.52 |
|
|
| 0.26 |
|
|
| 1.36 |
|
|
| 1.08 |
|
|
| 1.99 |
|
|
| 1.49 |
|
December 31, |
|
| 1.44 |
|
|
| 1.05 |
|
|
| 0.64 |
|
|
| 0.46 |
|
|
| 1.95 |
|
|
| 0.95 |
|
|
| 2.24 |
|
|
| 1.58 |
|
The Securities and Exchange Commission (the “SEC”) has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer’s account.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty buying or selling our securities.
HOLDERS OF OUR COMMON STOCK
As of April 2, 2018,March 26, 2021, we had 39,765,59121,970,638 shares of our common stock issued and outstanding and 4735 shareholders of record.
DIVIDEND POLICY
There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where after giving effect to the distribution of the dividend:
We would not be able to pay our debts as they become due in the usual course of business; or
Our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.
We have not declared any dividends, and we do not plan to declare any dividends in the foreseeable future. We are prohibited from paying dividends while our MSPLP is outstanding and for one year thereafter. See Note 10.
TRANSFER AGENT
Our stock transfer agent and registrar is ColonialPhiladelphia Stock Transfer, Company, Inc. located at 66 Exchange Place, 1st Floor, Salt Lake City, UT 84111.2320 Haverford Street, Ardmore, PA 19003. Their telephone number is (801) 355-5740.(484) 416-3124.
9
RECENT SALES OF UNREGISTERED SECURITIES
We have not yet adopted any formal equity compensation plans. During the three months ended December 31, 2017, we issued options to purchase 75,000 shares of common stock to members of our Board of Directors, which were valued at $57,472 using the Black-Scholes model. In each of the transactions listed above, the securities were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and rules and regulations promulgated thereunder. None of the transactions involved a public offering.
ITEM 6. SELECTED FINANCIAL DATA
A smaller reporting company is not required to provide the information required by this Item.
11
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources as of December 31, 2017 and 2016 and for the years ended December 31, 20172020 and 2016.2019. This discussion should be read together with our audited consolidated financial statements and related notes included in Item 8. Financial Statements and Supplementary Data.Financial Information. Some of the information contained in this discussion includes forward-looking statements that involve risks and uncertainties; therefore our “Special Note Regarding Forward-Looking Statements” should be reviewed for a discussion of important factors that could cause actual results to differ materially from the results described in, or implied by, such forward-looking statements.
OVERVIEW
We develop, acquire, manufactureassemble and market technology and entertainment-based products and services for the gaming industry for placement on the casino floor.floor and legal internet gaming sites. Our products and services primarily relate to licensed casino operators’ table games activities and focus on either increasing their profitability, productivity and security or expanding their gaming entertainment offerings in the form of proprietary table games, electronically enhanced table game platforms, fully-automated electronic tables and other ancillary equipment. In addition, we license intellectual property to legal internet gaming operators. Our products and services are offered in highly regulated markets throughout the world. Our products and services are manufacturedassembled at our headquarters and manufacturing facility in Las Vegas, Nevada, as well as outsourced for certain sub-assemblies in the United States.
Results of operations for the years ended December 31, 20172020 and 20162019. For the year ended December 31, 2017,2020, we generated gross revenues of $14,855,576$10,230,316 compared to $12,450,712$21,300,996 in 2016,2019, representing an increasea decrease of $2,404,864,$11,070,680, or 19.3%52.0%. This increasedecrease was primarily attributable to higher the COVID-19 crisis, as many of our land-based casino customers remained closed through the end of 2020, and those that were open had reduced capacity or realized reduced visitation which, in turn, resulted in us realizing no revenue from: (i) Bonus Jackpot System duefrom those that were closed and reduced revenue from those that were open. We continued to morerealize revenue from licensing our game placements; (ii) Premium Games such as High Card Flush and Heads Up Hold ’em, which command a higher price point per unit; (iii) Side Bet games such as Bonus Craps and 21+3; and (iv) internet-basedcontent to the online gaming activities.market through the end of 2020. With the PGP acquisition in the third quarter, we began to recognize revenue from licensing the newly-acquired game content of others to the online gaming market.
Selling, general and administrative expenses were $9,057,025$8,964,930 in 20172020 compared to $6,730,215$13,295,475 in 2016,2019, representing an increasea decrease of $2,326,810,$4,330,545, or 34.6%32.6%. Significant year-over-year changesThis decrease was primarily due to a decrease in compensation-related expenses directly related to the COVID-19 crisis (reduction in workforce, removal of bonuses and lower commissions and distributor fees). Lower legal fees contributed to the decrease as well. Prior year legal expenses included expenses associated with our strategic review, the Triangulum Lawsuit and the related contested proxy campaign. Current year legal expenses were comprised mainly of expenses related to the Triangulum Lawsuit. Also, the decrease in expenses related to travel and entertainment, royalty expenses and advertising and marketing were directly related to the COVID-19 crisis. In 2020, the Company incurred $652,198 in expenses associated with the Triangulum Lawsuit and $20,058 of severance expense. Excluding these costs, selling, general and administrative expenses are as follows:
|
|
| Year ended December 31, | |||
|
|
| 2017 |
|
| 2016 |
Compensation |
| $ | 3,829,310 |
| $ | 2,273,318 |
Legal and professional fees |
| $ | 1,972,514 |
| $ | 1,639,764 |
Employee compensation and related expenses increased as a resultpercentage of our investmentsgross revenue was 81.1% in personnel as we continue2020, compared to grow and attract new talent, as well as higher sales commissions due to increased revenues53.8% in 2017. Professional and compliance fees have increased due to on-going regulatory applications in various jurisdictions.2019.
Research and development expenses were $488,829$487,679 in 20172020 compared to $353,816$821,127 in 2016.2019, representing a decrease of $333,448, or 40.6%. This increasedecrease was primarily due to increased costs associated with testing our products currentlylower payroll and related expenses as a result of the departure of the former Chief Technology Officer in development.July 2019. Also, consulting expenses decreased due to the Company no longer using certain third-party research and development firms.
10
Share-based compensation expenses was $813,480were $737,991 in 2017,2020 compared to $145,732$927,696 in 2016,2019, representing an increasea decrease of $667,748,$189,705, or 458.2%20.4%. The increase was primarily due to stock options and restricted shares of common stock issued in 2017 to executive officers, board members and independent contractors, as well as an increase in our stock price during 2017.
Income from operations decreased $885,015, or 26.1%, to $2,503,624 in 2017 compared to $3,388,639 in 2016. This decrease was primarily attributablemainly due to higher selling, generalfewer restricted shares issued and administrative and share-based compensation expenses.at a lower stock price than the comparable prior-year period.
Settlement income was zero in 2017 compared to $697,214 in 2016. On July 11, 2016, we entered into a settlement agreement with Red Card Gaming, Inc. and AGS, LLC (“AGS”) to settle all claims and counter-claims related to contract dispute litigation. As a result of the settlement agreement, we recognized settlementchanges described above, loss from operations was $2,255,010 in 2020 compared to income from operations of $697,214$4,072,676 in 2016, which includes2019, a $350,000 payment from AGS and a releasedecrease of $347,214 in accrued contingent consideration then owed to AGS.$6,327,686, or 155.4%.
Total interest expense increased $487,577, or 40.3% to $1,696,737 for 2017was $683,357 in 2020 compared to $1,209,160$679,201 in 2016.2019, an increase of $4,156, or 0.6%. The increase inwas mainly attributable to lower interest on our Term Loan due to lower balances, offset by interest expense is primarily dueon our Revolving Loan (which was undrawn in 2019).
Share redemption consideration was $781,928 in 2020 compared to $510,775 in 2019, an increase of $271,153, or 53.1%. The increase was attributable to the 2016 TermTriangulum Redemption Consideration Obligation, which was outstanding for only a portion of the prior-year period.
On November 21, 2020, the Company received notification the PPP Loan Facility that was put in place in August 2016.
During 2016, we repaidhad been forgiven in full, including the PTG Notes and wrote off the related unamortized debt discounts, which resultedoriginal loan amount of $835,300 plus $4,943 in a loss of extinguishment of debt of $515,037.accrued interest.
The changebenefit for income taxes was ($605,936) in estimated fair value2020 based on an effective rate of warrants issued in connection with the Term Loan resulted in other expense of $409,717 for 201717.42 percent compared to $126,897the provision of $10,018 in 2016.2019 based on an effective rate of 0.3 percent. The estimated fair value is determined using17.42 percent effective tax rate for 2020 differed from the Black-Scholes pricing model, subject to a ceiling on the maximum amount we may have to pay to repurchase the warrants under certain circumstances.statutory federal income
The income 12
tax provision was $564,573 in 2017 compared to $770,723 in 2016. This changerate of 21.0 percent and was primarily attributable to (1)(i) the decrease in income before provision for income taxes; partially offset by (2) additionaltax benefit of approximately $1.2 million as a result of the net operating loss carryback provisions of the CARES Act and (ii) the income tax provision related to an amendment of approximately $560,000 as a result of a valuation allowance placed against the 2015 federal tax return in 2017; (3) the permanent book-to-tax difference generated by changes in the estimated fair value of the warrant liability as of and for the year ended December 31, 2017; and (4) a reduction in the value of ourCompany's certain deferred tax assets due to a decrease in the federal statutory corporate income tax rate.assets.
Adjusted EBITDA. Adjusted EBITDA includes adjustments to net (loss) income to exclude interest, income taxes, depreciation, amortization, share based compensation, lossgain on extinguishment of debt, foreign currency exchange gains,loss (gain), change in estimated fair value of warrantinterest rate swap liability and sseverance and other expenses related to litigationettlement income.. Adjusted EBITDA is not a measure of performance defined in accordance with U.S. generally accepted accounting principles ("in the United States of America (“U.S. GAAP"GAAP”). However, Adjusted EBITDA is used by management to evaluate our operating performance. Management believes that disclosure of the Adjusted EBITDA metric offers investors, regulators and other stakeholders a view of our operations in the same manner management evaluates our performance. When combined with U.S. GAAP results, management believes Adjusted EBITDA provides a comprehensive understanding of our financial results. Adjusted EBITDA should not be considered as an alternative to net income or to net cash provided by operating activities as a measure of operating results or of liquidity. It may not be comparable to similarly titled measures used by other companies, and it excludes financial information that some may consider important in evaluating our performance. A reconciliation of U.S. GAAP net income from operations to Adjusted EBITDA is as follows:
|
| Years ended December 31, |
|
| Years ended December 31, |
| ||||||||||
Adjusted EBITDA Reconciliation: |
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Net (loss) income |
| $ | (11,423 | ) |
| $ | 1,765,202 |
|
| $ | (2,208,887 | ) |
| $ | 2,943,376 |
|
Interest expense |
|
| 683,357 |
|
|
| 679,201 |
| ||||||||
Share redemption consideration |
|
| 781,928 |
|
|
| 510,775 |
| ||||||||
Interest income |
|
| (188 | ) |
|
| (202 | ) |
|
| (25,702 | ) |
|
| (68,634 | ) |
Interest expense |
|
| 1,696,737 |
|
|
| 1,209,160 |
| ||||||||
Income tax provision |
|
| 564,573 |
|
|
| 770,723 |
| ||||||||
Depreciation and amortization |
|
| 1,766,541 |
|
|
| 1,698,033 |
|
|
| 2,222,042 |
|
|
| 1,953,560 |
|
Share based compensation expense |
|
| 813,480 |
|
|
| 145,732 |
| ||||||||
Loss on extinguishment of debt |
|
| — |
|
|
| 515,037 |
| ||||||||
Foreign currency exchange gains |
|
| (155,792 | ) |
|
| (300,964 | ) | ||||||||
Change in estimated fair value of warrant liability |
|
| 409,717 |
|
|
| 126,897 |
| ||||||||
Settlement income |
|
| — |
|
|
| (697,214 | ) | ||||||||
Share-based compensation |
|
| 737,991 |
|
|
| 927,696 |
| ||||||||
Foreign currency exchange loss (gain) |
|
| 34,961 |
|
|
| (46,375 | ) | ||||||||
Change in estimated fair value of interest rate swap liability |
|
| (74,487 | ) |
|
| 44,315 |
| ||||||||
(Benefit) provision for income taxes |
|
| (605,937 | ) |
|
| 10,018 |
| ||||||||
Paycheck Protection Program Loan forgiveness |
|
| (840,243 | ) |
|
| — |
| ||||||||
Rebranding expense |
|
| — |
|
|
| 147,490 |
| ||||||||
Severance expense |
|
| 20,058 |
|
|
| 227,312 |
| ||||||||
Special project expense(1) |
|
| 652,198 |
|
|
| 1,470,563 |
| ||||||||
Adjusted EBITDA |
| $ | 5,083,645 |
|
| $ | 5,232,404 |
|
| $ | 1,377,279 |
|
| $ | 8,799,297 |
|
(1) | Includes expenses associated with the Triangulum Lawsuit in both 2020 and 2019 and the strategic review and related contested proxy campaign in 2019. |
Liquidity and capital resources.resources. We intendhave generally been able to fund our continuing operations, our investments and the obligations under our existing borrowings through increased sales and cash flow.flow from operations. However, the COVID-19 crisis resulted in negative cash provided by operations for the year ended December 31, 2020. But based on our forecast of a gradual recovery in the casino gaming industry from the lows of Q2 2020, combined with the $3.92 million in cash we received from the MSPLP, we believe we have adequate liquidity to meet our short-term obligations. However, if COVID-19 continues to force casino closures or if the recovery from the closures is slower than we anticipate, the issuance of debt or equity financing arrangements may be required to fund future expenditures or other cash requirements. There can be no assurance that we will be successful in raising additional funding, if necessary, and even if we are successful, it may not be on advantageous terms to us. If we are not able to secure additional funding, the implementation of our business plan could be impaired.negatively affected. In addition, we may incur higher capital expenditures in the future to expand our operations. We may from time to time acquire products and businesses complementary to our business. We may also incur significant expenses when applying for new licenses or in complying with current jurisdictional requirements. As a public entity, we may issue shares of our common stock and preferred stock in private or public
11
offerings to obtain financing, capital or to acquire other businesses that can improve our performance and growth. To the extent that we seek to acquire other businesses in exchange for our common stock, fluctuations in our stock price could have a material adverse effect on our ability to complete acquisitions.
As of December 31, 2017,2020, we had total current assets of $6,770,189$11,562,833 and total assets of $19,114,163. $30,574,594. This compares to $5,148,435$13,208,837 and $19,011,945,$22,987,053, respectively, as of December 31, 2016.2019. The increasedecrease in current assets as of December 31, 20172020 was primarily attributabledue to the Company closing on the Purchase Agreement in August 2020, resulting in a decrease in our cash balance. The increase in total assets as of December 31, 2020 was primarily due to an increase in cash and cash equivalents, accounts receivable, net and prepaid expense and other assets. Cash increased due to reduced principal paymentsour Intangibles balance of $10.4 million, as a result of acquiring customer agreements in connection with the closing on the Term Loan as compared to the PTG Notes, partially offset by cash used to pay off the Related Party Note Payable in August 2017. Purchase Agreement.
Our total current liabilities increased from $4,708,685 as of December 31, 20162020 increased to $4,869,335 as$4,201,095 from $4,157,841, primarily due the Company drawing down on its $1,000,000 Revolving Loan on March 12, 2020.
Despite the COVID-19 crisis, our business was profitable in Q1 2020. However, our business was not profitable for the remainder of December 31, 2017. Our business model continues to be profitable and we2020. We do have several options to ensure we are ablesufficient working capital to meet our short-term and long-term obligations.obligations as they become due. Further, we do not currently believe that the recent temporary casino closures in the both the United Kingdom and United States will result in an impairment of our assets or a default under our loan agreements.
We have undertaken certain growth initiativescontinue to expand our recurring revenue base. As such we have made investments in personnel and research related to the development of our enhanced table systems. Additionally, we increased our sales and marketing budget and spent funds on regulatory efforts for the purpose of expanding the jurisdictions in which we can operate in. We have filedfile applications for new or enhanced licenses in several jurisdictions, which may result in significant future legal and regulatory expenses. A significant increase in such expenses may require us to postpone growth initiatives or investments in personnel, inventory and research and development of our products. It is our intention to continue such initiatives and investments. However, to the extent we are not able to achieve our growth objectives or raise additional capital, we will need to evaluate the reduction of operating expenses.
At December 31, 2017, we do not have any available third-party lines or letters of credit or any written or oral commitments from officers or shareholders to provide us with loans or advances to support our operations or fund potential acquisitions.
Our operating activities provided $2,825,866used $1,586,247 in cash for the year ended December 31, 2017,2020, compared to $4,167,531cash provided of $4,890,595 for the year ended December 31, 2016.2019. The decrease in operating cash flow was primarily due to (1) decreases inthe net income and (2) increases in non-cash addbacks due to higher share-based compensation and higher expense related to changes in estimated fair valueloss for the period as a result of warrant liability in 2017 as compared to 2016, partially offset by loss on extinguishment of debt recorded in 2016.the COVID-19 crisis.
Additionally, investingInvesting activities used cash of $100,617$6,456,714 for the year December 31, 2020, compared to $163,351 for the year ended December 31, 2017, compared2019. This was due to $82,702closing of the Purchase Agreement in August 2020.
Cash provided by financing activities for the year ended December 31, 2016. This2020 was $4,389,234, which resulted from the $1,000,000 draw on our Revolving Loan on March 12, 2020, $835,300 from the PPP Loan and $3,920,000 from the MSPLP (net of debt issuance costs), offset by an increase in cash used in investing activities was dueprincipal payments on our long-term debt. This compares to investment in intangible assets in 2017 and higher expenditure on property and equipment.
Cash$1,363,047 cash used in financing activities during the year ended December 31, 2017 was $1,664,445 compared to $2,318,805 for the year ended December 31, 2016. Cash used in financing activities consisted of principal payments towards long-term debt and capital leases and payments of debt issuance costs, partially offset by the proceeds received from stock option exercises.comparable prior period.
Critical Accounting Policies. The discussion of ourOur consolidated financial condition and results of operations is based upon our financial statements which have been prepared in accordance with U.S. GAAP. CriticalWe consider the following accounting policies are those policies that, in management's view, areto be the most important to understanding and evaluating our financial results:
Revenue recognition. We account for our revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. We generate revenue primarily from the licensing of our intellectual property. We recognize revenue under recurring fee license contracts monthly as we satisfy our performance obligation, which consists of granting the customer the right to use our intellectual property. Amounts billed are determined based on flat rates or usage rates stipulated in the portrayalcustomer contract.
Goodwill and other intangible assets. Goodwill and other intangible assets are assessed for impairment at least annually or at other times during the year if events or circumstances indicate that it is more likely than not that the fair value of a reporting asset is below the carrying amount. If found to be impaired, the carrying amounts will be reduced, and an impairment loss will be recognized.
Long-term liabilities. The Company issued a promissory note in the face amount of $39,096,401 to Triangulum on May 6, 2019 in connection with the share redemption disclosed in Note 1. The promissory note has not been given accounting effect in the Company’s financial statements. The Company has instead recorded a long-term obligation payable to Triangulum, based on the redemption value specified in our financial condition and resultsArticles of operations. See Note 3Incorporation. The obligation is classified as long-term because we do not expect that a final agreement with respect to our financial statements includedthe litigation will be reached between the parties in Item 8. “Financial Statements and Supplementary Data” for further detail on these critical accounting policies.the next twelve months.
Off balance sheet arrangements. As of December 31, 2017,2020, there were no off-balance sheet arrangements.
Significant equipment.Recently issued accounting pronouncements. While we anticipate additional purchases of furniture and equipment in conjunction with our personnel expansion, weWe do not anticipate such purchasesexpect the adoption of recently issued accounting pronouncements to be material.have a significant impact on our results of operations, financial position or cash flow.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A smaller reporting company is not required to provide the information required by this Item.
12
ITEMITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAFINANCIAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
13
REPORT OF INDEPENDENT REGISTEREDREGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders Galaxy Gaming, Inc. Las Vegas, Nevada
|
Opinion on the Financial Statements. We have audited the accompanying balance Adoption of New Accounting Principles. As discussed in Note 2, effective January 1, 2019, the Company adopted the Financial Accounting Standards Board’s Accounting Standards Codification Topic 842, “Leases,” and Subtopic 350-40, “Intangibles - Goodwill and Other - Internal-Use Software,” on October 1, 2019, bothusing the modified retrospective transition method. Our opinion is not modified with respect to these matters.
|
Basis for Opinion. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our
|
We conducted our
|
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
We served as the Company's auditor from 2016 to 2019. |
/s/ Piercy Bowler Taylor & Kern
Piercy Bowler Taylor & Kern Certified Public Accountants
Las Vegas, Nevada
|
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors Galaxy Gaming, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Galaxy Gaming, Inc. (the “Company”) as of December 31, 2020, the related consolidated statements of operations and comprehensive income, stockholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the Audit Committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements, and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Valuation of Goodwill and Intangible Assets As described in Note 2, the Company performed a qualitative evaluation of goodwill impairment on December 31, 2020, and determined it was necessary to also perform a quantitative assessment of whether the fair value of its reporting unit was less than its carrying amount. The Company also evaluated whether certain intangible assets were recoverable by comparing the carrying value of those asset groups to their expected undiscounted future cash flows. Each of these quantitative impairment evaluations utilizes significant estimates and assumptions determined by management. The Company used an income approach to estimate the fair value of its reporting unit, which utilizes estimates and assumptions related to forecasts of future revenues, operating margins, and the selection of the discount rates. Similarly, the Company’s recoverability tests also involve significant estimates and assumptions related to forecasted cash flows associated with specific asset groups. Changes in these assumptions could have a significant impact on either the determined fair value of the reporting unit or the recoverability of the asset groups, potentially affecting the determination of resulting impairment charges. The Company determined the fair value of the reporting unit exceeded its carrying value as of the measurement date and, therefore, no goodwill impairment was recognized. The Company also determined the sum of the estimated undiscounted future cash flows attributable to its asset groups exceeded their carrying amount, and therefore, no intangible asset impairment was recognized. We identified the Company’s determination of the fair value of its sole reporting unit and its determination of forecasted cash flows associated with certain asset groups as a critical audit matter. This determination was made given the subjectivity in estimating the forecasts of future revenues and operating margins and selection of the discount rate in determining the fair value of the reporting unit, and in estimating future cash flows associated with intangible asset groups. A high degree of auditor judgment was required when evaluating the audit evidence supporting these estimates considering the current economic environment as impacted by the COVID-19 pandemic, and the degree of unpredictability related to the circumstances. Our audit procedures related to forecasts of future revenues and operating margins and selection of the discount rate for the reporting unit included the following, among others: •We tested the mathematical accuracy and completeness of the calculation of the underlying cash flows used to determine the fair value of the reporting unit. •We evaluated management’s ability to accurately forecast future revenues and operating margins by comparing actual results to management’s historical forecasts. •We evaluated the reasonableness of management’s revenue and operating margins forecasts by comparing the forecasts to historical revenues and operating margins. •With the assistance of our valuation specialists, we evaluated the reasonableness of the (1) valuation methodology, (2) projection of certain key assumptions underlying the fair value estimate and (3) discount rate by (i) testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation, and (ii) developing a range of independent estimates and comparing those to the discount rate selected by management. •We assessed the impact of changing the key assumptions related to forecasts of future revenue and operating margins, and selection of the discount rate, on the underlying fair value estimate. /s/ Moss Adams LLP San Diego, California March 30, 2021 We have served as the Company’s auditor since 2020 |
17
18
DecemberDECEMBER 31, 20172020 AND 20162019
ASSETS |
| 2017 |
|
| 2016 |
| ||
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 3,486,147 |
|
| $ | 2,304,761 |
|
Restricted cash |
|
| 95,062 |
|
|
| 84,577 |
|
Accounts receivable, net of allowance for bad debts of $32,993 and $31,125, respectively |
|
| 2,301,752 |
|
|
| 2,137,245 |
|
Inventory, net |
|
| 524,126 |
|
|
| 427,105 |
|
Prepaid expense and other |
|
| 363,102 |
|
|
| 194,747 |
|
Total current assets |
|
| 6,770,189 |
|
|
| 5,148,435 |
|
Property and equipment, net |
|
| 263,867 |
|
|
| 356,253 |
|
Assets deployed at client locations, net |
|
| 373,650 |
|
|
| 212,131 |
|
Goodwill and other intangible assets, net |
|
| 11,452,809 |
|
|
| 12,846,019 |
|
Deferred tax assets, net |
|
| 230,648 |
|
|
| 367,057 |
|
Other assets, net |
|
| 23,000 |
|
|
| 82,050 |
|
Total assets |
| $ | 19,114,163 |
|
| $ | 19,011,945 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 1,035,383 |
|
| $ | 461,913 |
|
Accrued expenses |
|
| 887,796 |
|
|
| 1,109,428 |
|
Income taxes payable |
|
| 519,610 |
|
|
| 786,430 |
|
Deferred revenue |
|
| 1,083,639 |
|
|
| 1,014,731 |
|
Deferred rent, current portion |
|
| 23,679 |
|
|
| 14,938 |
|
Current portion of long-term debt and capital lease obligations |
|
| 1,195,787 |
|
|
| 1,230,285 |
|
Other current liabilities |
|
| 123,441 |
|
|
| 90,960 |
|
Total current liabilities |
|
| 4,869,335 |
|
|
| 4,708,685 |
|
Deferred rent, net |
|
| 14,025 |
|
|
| 37,704 |
|
Capital lease obligations, net |
|
| 14,217 |
|
|
| 46,978 |
|
Common stock warrant liability |
|
| 1,333,333 |
|
|
| 923,616 |
|
Long-term debt, net |
|
| 7,420,385 |
|
|
| 8,669,151 |
|
Total liabilities |
|
| 13,651,295 |
|
|
| 14,386,134 |
|
Commitments and Contingencies (See Note 10) |
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
|
|
|
|
Preferred stock, 10,000,000 shares authorized, $0.001 par value; 0 shares issued and outstanding, respectively |
|
| — |
|
|
| — |
|
Common stock, 65,000,000 shares authorized; $0.001 par value; 39,565,591 and 39,315,591 shares issued and outstanding, respectively |
|
| 39,566 |
|
|
| 39,316 |
|
Additional paid-in capital |
|
| 3,957,703 |
|
|
| 3,109,473 |
|
Accumulated earnings |
|
| 1,465,599 |
|
|
| 1,477,022 |
|
Total stockholders’ equity |
|
| 5,462,868 |
|
|
| 4,625,811 |
|
Total liabilities and stockholders’ equity |
| $ | 19,114,163 |
|
| $ | 19,011,945 |
|
ASSETS |
| 2020 |
|
| 2019 |
| ||
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 5,993,388 |
|
| $ | 9,686,698 |
|
Accounts receivable, net of allowance of $145,000 and $77,433, respectively |
|
| 2,493,254 |
|
|
| 1,834,488 |
|
Inventory, net |
|
| 668,525 |
|
|
| 665,654 |
|
Income tax receivable |
|
| 1,229,795 |
|
|
| 260,347 |
|
Prepaid expenses |
|
| 1,167,068 |
|
|
| 757,826 |
|
Other current assets |
|
| 10,803 |
|
|
| 3,824 |
|
Total current assets |
|
| 11,562,833 |
|
|
| 13,208,837 |
|
Property and equipment, net |
|
| 116,724 |
|
|
| 144,909 |
|
Operating lease right-of-use assets |
|
| 1,367,821 |
|
|
| 306,859 |
|
Assets deployed at client locations, net |
|
| 232,156 |
|
|
| 405,522 |
|
Goodwill |
|
| 1,091,000 |
|
|
| 1,091,000 |
|
Other intangible assets, net |
|
| 16,086,896 |
|
|
| 7,430,643 |
|
Deferred tax assets, net |
|
| — |
|
|
| 399,283 |
|
Other assets, net |
|
| 117,164 |
|
|
| — |
|
Total assets |
| $ | 30,574,594 |
|
| $ | 22,987,053 |
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 467,792 |
|
| $ | 766,305 |
|
Accrued expenses |
|
| 1,286,333 |
|
|
| 1,450,879 |
|
Revenue contract liability |
|
| 29,167 |
|
|
| 29,167 |
|
Current portion of long-term debt |
|
| 2,222,392 |
|
|
| 1,634,527 |
|
Current portion of operating lease liabilities |
|
| 195,411 |
|
|
| 276,963 |
|
Total current liabilities |
|
| 4,201,095 |
|
|
| 4,157,841 |
|
Long-term operating lease liabilities |
|
| 1,215,680 |
|
|
| 30,325 |
|
Long-term liabilities, net |
|
| 49,691,184 |
|
|
| 46,291,014 |
|
Interest rate swap liability |
|
| 66,009 |
|
|
| 140,495 |
|
Deferred tax liabilities, net |
|
| 197,591 |
|
|
| — |
|
Total liabilities |
|
| 55,371,559 |
|
|
| 50,619,675 |
|
Commitments and Contingencies (See Note 11) |
|
|
|
|
|
|
|
|
Stockholders’ deficit |
|
|
|
|
|
|
|
|
Preferred stock, 10,000,000 shares authorized, $0.001 par value; 0 shares issued and outstanding, respectively |
|
| — |
|
|
| — |
|
Common stock, 65,000,000 shares authorized; $0.001 par value; 21,970,638 and 18,017,944 shares issued and outstanding, respectively |
|
| 21,971 |
|
|
| 18,018 |
|
Additional paid-in capital |
|
| 10,798,536 |
|
|
| 5,795,636 |
|
Accumulated deficit |
|
| (35,655,163 | ) |
|
| (33,446,276 | ) |
Accumulated other comprehensive income |
|
| 37,691 |
|
|
| — |
|
Total stockholders’ deficit |
|
| (24,796,965 | ) |
|
| (27,632,622 | ) |
Total liabilities and stockholders’ deficit |
| $ | 30,574,594 |
|
| $ | 22,987,053 |
|
The accompanying notes are an integral part of the consolidated financial statements.
1519
STATEMENTSCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED DecemberDECEMBER 31, 20172020 AND 20162019
|
|
| 2017 |
|
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product leases and royalties |
| $ | 14,845,926 |
|
| $ | 12,436,748 |
| ||||||||
Product sales and service |
|
| 9,650 |
|
|
| 13,964 |
| ||||||||
Licensing fees |
| $ | 10,230,316 |
|
| $ | 21,300,996 |
| ||||||||
Total revenue |
|
| 14,855,576 |
|
|
| 12,450,712 |
|
| $ | 10,230,316 |
|
| $ | 21,300,996 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of ancillary products and assembled components |
|
| 226,077 |
|
|
| 134,277 |
|
|
| 72,684 |
|
|
| 230,462 |
|
Selling, general and administrative |
|
| 9,057,025 |
|
|
| 6,730,215 |
|
|
| 8,964,930 |
|
|
| 13,295,475 |
|
Research and development |
|
| 488,829 |
|
|
| 353,816 |
|
|
| 487,679 |
|
|
| 821,127 |
|
Depreciation and amortization |
|
| 1,766,541 |
|
|
| 1,698,033 |
|
|
| 2,222,042 |
|
|
| 1,953,560 |
|
Share-based compensation |
|
| 813,480 |
|
|
| 145,732 |
|
|
| 737,991 |
|
|
| 927,696 |
|
Total costs and expenses |
|
| 12,351,952 |
|
|
| 9,062,073 |
|
|
| 12,485,326 |
|
|
| 17,228,320 |
|
Income from operations |
|
| 2,503,624 |
|
|
| 3,388,639 |
| ||||||||
(Loss) income from operations |
|
| (2,255,010 | ) |
|
| 4,072,676 |
| ||||||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement income |
|
| — |
|
|
| 697,214 |
| ||||||||
Interest income |
|
| 25,702 |
|
|
| 68,634 |
| ||||||||
Interest expense |
|
| (1,696,737 | ) |
|
| (1,209,160 | ) |
|
| (683,357 | ) |
|
| (679,201 | ) |
Loss on extinguishment of debt |
|
| — |
|
|
| (515,037 | ) | ||||||||
Foreign currency exchange gains |
|
| 155,792 |
|
|
| 300,964 |
| ||||||||
Change in estimated fair value of warrant liability |
|
| (409,717 | ) |
|
| (126,897 | ) | ||||||||
Interest income |
|
| 188 |
|
|
| 202 |
| ||||||||
Share redemption consideration |
|
| (781,928 | ) |
|
| (510,775 | ) | ||||||||
Foreign currency exchange (loss) gain |
|
| (34,961 | ) |
|
| 46,375 |
| ||||||||
Change in estimated fair value of interest rate swap liability |
|
| 74,487 |
|
|
| (44,315 | ) | ||||||||
Paycheck Protection Program Loan forgiveness |
|
| 840,243 |
|
|
| — |
| ||||||||
Total other expense |
|
| (1,950,474 | ) |
|
| (852,714 | ) |
|
| (559,814 | ) |
|
| (1,119,282 | ) |
Income before provision for income taxes |
|
| 553,150 |
|
|
| 2,535,925 |
| ||||||||
Provision for income taxes |
|
| (564,573 | ) |
|
| (770,723 | ) | ||||||||
(Loss) income before benefit (provision) for income taxes |
|
| (2,814,824 | ) |
|
| 2,953,394 |
| ||||||||
Benefit (provision) for income taxes |
|
| 605,937 |
|
|
| (10,018 | ) | ||||||||
Net (loss) income |
| $ | (11,423 | ) |
| $ | 1,765,202 |
|
|
| (2,208,887 | ) |
|
| 2,943,376 |
|
Net (loss) income per share, basic |
| $ | (0.00 | ) |
| $ | 0.05 |
| ||||||||
Net (loss) income per share, diluted |
| $ | (0.00 | ) |
| $ | 0.04 |
| ||||||||
Foreign currency translation adjustment |
|
| 37,691 |
|
|
| — |
| ||||||||
Comprehensive (loss) income |
| $ | (2,171,196 | ) |
| $ | 2,943,376 |
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net (loss) income per share: |
|
|
|
|
|
|
|
| ||||||||
Basic |
| $ | (0.12 | ) |
| $ | 0.12 |
| ||||||||
Diluted |
| $ | (0.12 | ) |
| $ | 0.11 |
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 39,418,194 |
|
|
| 39,162,303 |
|
|
| 18,282,262 |
|
|
| 25,521,232 |
|
Diluted |
|
| 39,418,194 |
|
|
| 39,592,827 |
|
|
| 18,282,262 |
|
|
| 27,144,397 |
|
The accompanying notes are an integral part of the consolidated financial statements.
16
GALAXY GAMING, INC.
STATEMENTCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYDEFICIT
YEARS ENDED DecemberDECEMBER 31, 20172020 AND 20162019
|
| Common Stock |
|
| Additional Paid in |
|
| (Accumulated Deficit) |
|
| Total Shareholders’ |
| ||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Retained Earnings |
|
| Equity |
| |||||
Beginning balance, January 1, 2016 |
|
| 39,215,591 |
|
| $ | 39,216 |
|
| $ | 2,963,841 |
|
| $ | (288,180 | ) |
| $ | 2,714,877 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,765,202 |
|
|
| 1,765,202 |
|
Share based compensation expense |
|
| 100,000 |
|
|
| 100 |
|
|
| 145,632 |
|
|
| — |
|
|
| 145,732 |
|
Balance, December 31, 2016 |
|
| 39,315,591 |
|
|
| 39,316 |
|
|
| 3,109,473 |
|
|
| 1,477,022 |
|
|
| 4,625,811 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11,423 | ) |
|
| (11,423 | ) |
Share based compensation expense |
|
| 250,000 |
|
|
| 250 |
|
|
| 848,230 |
|
|
| — |
|
|
| 848,480 |
|
Balance, December 31, 2017 |
|
| 39,565,591 |
|
| $ | 39,566 |
|
| $ | 3,957,703 |
|
| $ | 1,465,599 |
|
| $ | 5,462,868 |
|
|
| Common Stock |
|
| Additional Paid in |
|
| Accumulated Earnings |
|
| Accumulated Other |
|
| Total Shareholders' |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| (Deficit) |
|
| Comprehensive Income |
|
| Deficit |
| ||||||
Beginning balance, January 1, 2019 |
|
| 39,921,591 |
|
| $ | 39,922 |
|
| $ | 4,733,701 |
|
| $ | 2,683,478 |
|
| $ | — |
|
| $ | 7,457,101 |
|
Common stock redemption |
|
| (23,271,667 | ) |
|
| (23,271 | ) |
|
| — |
|
|
| (39,073,130 | ) |
|
| — |
|
|
| (39,096,401 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,943,376 |
|
|
| — |
|
|
| 2,943,376 |
|
Stock options exercised |
|
| 656,220 |
|
|
| 655 |
|
|
| 134,951 |
|
|
| — |
|
|
| — |
|
|
| 135,606 |
|
Share-based compensation |
|
| 711,800 |
|
|
| 712 |
|
|
| 926,984 |
|
|
| — |
|
|
| — |
|
|
| 927,696 |
|
Balance, December 31, 2019 |
|
| 18,017,944 |
|
|
| 18,018 |
|
|
| 5,795,636 |
|
|
| (33,446,276 | ) |
| $ | — |
|
|
| (27,632,622 | ) |
Shares issued in connection with PGP asset acquisition |
|
| 3,141,361 |
|
|
| 3,141 |
|
|
| 3,986,387 |
|
|
| — |
|
|
| — |
|
|
| 3,989,528 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,208,887 | ) |
|
| — |
|
|
| (2,208,887 | ) |
Foreign currency translation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 37,691 |
|
|
| 37,691 |
|
Stock options exercised |
|
| 558,000 |
|
|
| 559 |
|
|
| 278,775 |
|
|
| — |
|
|
| — |
|
|
| 279,334 |
|
Share-based compensation |
|
| 253,333 |
|
|
| 253 |
|
|
| 737,738 |
|
|
| — |
|
|
| — |
|
|
| 737,991 |
|
Balance, December 31, 2020 |
|
| 21,970,638 |
|
| $ | 21,971 |
|
| $ | 10,798,536 |
|
| $ | (35,655,163 | ) |
| $ | 37,691 |
|
| $ | (24,796,965 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
17
GALAXY GAMING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED December 31, 20172020 AND 20162019
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
| $ | (11,423 | ) |
| $ | 1,765,202 |
|
| $ | (2,208,887 | ) |
| $ | 2,943,376 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization |
|
| 1,766,541 |
|
|
| 1,698,033 |
| ||||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization of intangible assets |
|
| 2,222,042 |
|
|
| 1,939,274 |
| ||||||||
Non-cash lease expense |
|
| 329,040 |
|
|
| 267,474 |
| ||||||||
Amortization of debt issuance costs and debt discount |
|
| 291,500 |
|
|
| 217,350 |
|
|
| 38,195 |
|
|
| 38,272 |
|
Provision for bad debt expense |
|
| 8,060 |
|
|
| 13,849 |
| ||||||||
Inventory reserve |
|
| 68,501 |
|
|
| 26,425 |
| ||||||||
Loss on extinguishment of debt |
|
| — |
|
|
| 515,037 |
| ||||||||
Change in estimated fair value of warrant liability |
|
| 409,717 |
|
|
| 126,897 |
| ||||||||
Deferred income tax provision |
|
| 136,409 |
|
|
| 69,280 |
| ||||||||
Bad debt expense |
|
| 226,691 |
|
|
| 111,938 |
| ||||||||
Change in estimated fair value of interest rate swap liability |
|
| (74,487 | ) |
|
| 44,315 |
| ||||||||
Gain on forgiveness of Paycheck Protection Program Loan |
|
| (835,300 | ) |
|
| — |
| ||||||||
Deferred income tax benefit |
|
| 596,874 |
|
|
| (64,801 | ) | ||||||||
Share-based compensation |
|
| 813,480 |
|
|
| 145,732 |
|
|
| 737,991 |
|
|
| 927,696 |
|
Unrealized foreign exchange (gains) losses on cash and cash equivalents |
|
| (120,582 | ) |
|
| 31,886 |
| ||||||||
Unrealized foreign exchange loss (gain) |
|
| 46,885 |
|
|
| (10,938 | ) | ||||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
| (10,485 | ) |
|
| 13,282 |
| ||||||||
Accounts receivable |
|
| (172,567 | ) |
|
| (322,423 | ) |
|
| (236,890 | ) |
|
| (495,167 | ) |
Inventory |
|
| (448,319 | ) |
|
| (177,511 | ) |
|
| (51,709 | ) |
|
| (343,724 | ) |
Prepaid expenses and other current assets |
|
| (76,435 | ) |
|
| (126,176 | ) | ||||||||
Income tax receivable/payable |
|
| (893,930 | ) |
|
| (260,347 | ) | ||||||||
Prepaid expense and other current assets |
|
| 259,616 |
|
|
| (15,272 | ) | ||||||||
Accounts payable |
|
| 573,470 |
|
|
| (959,936 | ) |
|
| (1,081,836 | ) |
|
| 84,369 |
|
Income tax payable |
|
| (266,820 | ) |
|
| 596,935 |
| ||||||||
Accrued expenses |
|
| (221,632 | ) |
|
| 258,537 |
|
|
| (257,179 | ) |
|
| 73,218 |
|
Deferred revenue |
|
| 68,908 |
|
|
| 297,041 |
| ||||||||
Jackpot liabilities |
|
| 32,481 |
|
|
| (15,711 | ) | ||||||||
Deferred rent |
|
| (14,938 | ) |
|
| (6,198 | ) | ||||||||
Net cash provided by operating activities |
|
| 2,825,866 |
|
|
| 4,167,531 |
| ||||||||
Revenue contract liability |
|
| — |
|
|
| (10,723 | ) | ||||||||
Operating lease liabilities |
|
| (403,363 | ) |
|
| (266,784 | ) | ||||||||
Other current liabilities |
|
| — |
|
|
| (71,581 | ) | ||||||||
Net cash (used in) provided by operating activities |
|
| (1,586,247 | ) |
|
| 4,890,595 |
| ||||||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in intangible assets |
|
| (43,917 | ) |
|
| — |
|
|
| — |
|
|
| (57,400 | ) |
Acquisition of PGP assets |
|
| (6,393,920 | ) |
|
| — |
| ||||||||
Acquisition of property and equipment |
|
| (56,700 | ) |
|
| (82,702 | ) |
|
| (62,794 | ) |
|
| (105,951 | ) |
Net cash used in investing activities |
|
| (100,617 | ) |
|
| (82,702 | ) |
|
| (6,456,714 | ) |
|
| (163,351 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from draw on revolving loan |
|
| 1,000,000 |
|
|
| — |
| ||||||||
Proceeds from Paycheck Protection Program |
|
| 835,300 |
|
|
| — |
| ||||||||
Proceeds from Mainstreet Priority Loan Program |
|
| 3,920,000 |
|
|
| — |
| ||||||||
Proceeds from stock option exercises |
|
| 35,000 |
|
|
| — |
|
|
| 279,334 |
|
|
| 199,733 |
|
Debt issuance costs |
|
| (17,091 | ) |
|
| (637,995 | ) | ||||||||
Proceeds received from long-term debt |
|
| — |
|
|
| 10,500,000 |
| ||||||||
Principal payments on capital lease obligations |
|
| (31,006 | ) |
|
| (59,197 | ) | ||||||||
Payments of debt issuance costs |
|
| — |
|
|
| (34,058 | ) | ||||||||
Principal payments on finance lease obligations |
|
| — |
|
|
| (14,198 | ) | ||||||||
Principal payments on long-term debt |
|
| (1,651,348 | ) |
|
| (12,121,613 | ) |
|
| (1,645,400 | ) |
|
| (1,514,524 | ) |
Net cash used in financing activities |
|
| (1,664,445 | ) |
|
| (2,318,805 | ) | ||||||||
Net cash provided by (used in) financing activities |
|
| 4,389,234 |
|
|
| (1,363,047 | ) | ||||||||
Effect of exchange rate changes on cash |
|
| 120,582 |
|
|
| (31,886 | ) |
|
| (39,583 | ) |
|
| 10,938 |
|
Net increase in cash and cash equivalents |
|
| 1,181,386 |
|
|
| 1,734,138 |
| ||||||||
Net (decrease) increase in cash and cash equivalents |
|
| (3,693,310 | ) |
|
| 3,375,135 |
| ||||||||
Cash and cash equivalents – beginning of period |
|
| 2,304,761 |
|
|
| 570,623 |
|
|
| 9,686,698 |
|
|
| 6,311,563 |
|
Cash and cash equivalents – end of period |
| $ | 3,486,147 |
|
| $ | 2,304,761 |
|
| $ | 5,993,388 |
|
| $ | 9,686,698 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 1,407,840 |
|
| $ | 1,221,390 |
|
| $ | 612,840 |
|
| $ | 684,139 |
|
Cash paid for income taxes |
| $ | 75,786 |
|
| $ | 453,297 |
| ||||||||
Supplemental schedule of non-cash activities: |
|
|
|
|
|
|
|
| ||||||||
Common stock redemption in exchange for Redemption Consideration Obligation |
| $ | — |
|
| $ | 39,096,401 |
| ||||||||
Shares issued in connection with PGP asset acquisition |
| $ | 3,989,528 |
|
| $ | — |
| ||||||||
Gain on forgiveness of Paycheck Protection Program Loan |
| $ | 835,300 |
|
| $ | — |
| ||||||||
Insurance acquired under note payable |
| $ | 678,108 |
|
| $ | 197,455 |
| ||||||||
Right-of-use assets obtained in exchange for lease liabilities |
| $ | 1,390,002 |
|
| $ | 574,333 |
| ||||||||
Inventory transferred to assets deployed at client locations |
| $ | 282,797 |
|
| $ | 135,681 |
|
| $ | 48,838 |
|
| $ | 209,884 |
|
Cash paid for income taxes |
| $ | 671,615 |
|
| $ | 71,700 |
| ||||||||
Supplemental non-cash financing activities information: |
|
|
|
|
|
|
|
| ||||||||
Issuance of warrants in conjunction with term loan |
| $ | — |
|
| $ | 796,719 |
| ||||||||
Assets acquired under note payable |
| $ | — |
|
| $ | 108,055 |
|
The accompanying notes are an integral part of the consolidated financial statements.
GALAXY GAMING, INC.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DecemberDECEMBER 31, 20172020 AND 20162019
NOTE 1. NATURE OF OPERATIONS
Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refer to Galaxy Gaming, Inc., a Nevada corporation (“Galaxy Gaming”).
Nature of operations. We are an established global gaming company specializing in the design, development, manufacturing,acquisition, assembly, marketing and acquisitionlicensing of proprietary casino table games and associated technology, platforms and systems for the casino gaming industry. Casinos use our proprietary products and services to enhance their gaming floor operations and improve their profitability, productivity and security, as well as to offer popular cutting-edge gaming entertainment content and technology to their players. We market our products and services to online casinos worldwide and to land-based riverboat, cruise ship and internetcasino gaming companies located in North America, the Caribbean, Central America, the British Isles,United Kingdom, Europe and Africa and to cruise shipsship companies. We license our products and internetservices for use solely in legalized gaming sites worldwide. markets. We also license our content and distribute content from other companies to iGaming operators throughout the world.
NOTE 2. SIGNIFICANT 2017 BUSINESS DEVEVELOPMENTS
Appointment of new Secretary, Treasurer and Chief Financial Officer. Share Redemption.On May 1, 2017,6, 2019, we entered into an employment agreement with Harry C. Hagerty (the “Hagerty Employment Agreement”), pursuant to which Mr. Hagerty serves as our Secretary, Treasurer and Chief Financial Officer for a term that extends through April 30, 2020. Pursuant to the Hagerty Employment Agreement, Mr. Hagerty will receive a base salary of $120,000 per annum, will be eligible for bonuses if and as approved by the Compensation Committee of the Board and was granted options to purchase our common stock (Note 14). The Hagerty Employment Agreement was subsequently amended on January 1, 2018 to increase the base salary to $200,000 per annum.
Resignation of Chairman, Chief Executive Officer (“CEO”) and President. On July 24, 2017, Robert B. Saucier resigned from his positions as Chairman of the Board of Directors (the “Board”), CEO and President in order to aid us in our expanded regulatory jurisdictional ambitions. Mr. Saucier currently serves as Executive Vice President of Business Development, for which he will receive an annual salary of $225,000 and will be eligible to receive performance-based bonuses and incentives, as well as employee benefits and other perquisites. Mr. Saucier’s resignation was not the result of any disagreements with the Company, and he remains a member of the Board.
Appointment of new President and CEO. EffectiveJuly 24, 2017, the Board appointed Todd P. Cravens to serve as President and CEO. Mr. Cravens was previously serving as our Vice President of Business Development, a position he had held since January 1, 2017.
Mr. Cravens’ employment agreement related to his position as Vice President of Business Development was terminated and superseded with a new employment agreement to reflect his new positions and responsibilities.
Pursuant to the new employment agreement (the “Cravens Employment Agreement”), Mr. Cravens receives an annual base salary of $230,000 (increasing to $250,000 on August 1, 2018), is eligible for bonuses if and as approved by the Compensation Committee of the Board and was granted options to purchase our common stock (Note 14). The term of the Cravens Employment Agreement is through July 26, 2020. Mr. Cravens is entitled to certain severance payments in the event his employment with us is terminated by us without cause or following a change of control, or following termination of the Cravens Employment Agreement by Mr. Cravens under certain circumstances.
Appointment of new Director. On July 26, 2017, the Board appointed Mark A. Lipparelli as a member of the Board to fill a newly-created board seat and elected Mr. Lipparelli to serve as Chairman of the Board. On August 31, 2017, we entered into a Board of Directors Services Agreement (the “Lipparelli Agreement”), pursuant to which Mr. Lipparelli receives monthly compensation of $7,500 andredeemed all customary and usual fringe benefits generally available to non-employee directors of the Board, and was granted shares of our restricted common stock(Note 12).
Voting and dispositive control transfer agreements. On September 22, 2017, the Nevada Gaming Commission (the “NGC”) granted us licensure as a manufacturer and distributor of gaming products, which approval triggered the effectiveness of five Voting and Dispositive Control Transfer Agreements (the “VDCTA Agreements”). The VDCTA Agreements collectively served to transfer voting and dispositive control of certain shares owned of record by Triangulum Partners, LLC, a New Mexico limited liability company (“Triangulum”) to named recipients (each a “Recipient” and collectively, the “Recipients”).
We and the Recipients (named below) previously entered into the VDCTA Agreements on August 18, 2017. However, the VDCTA Agreements did not become effective until September 22, 2017, concurrently with the NGC granting us a license as a manufacturer and distributor of gaming products in accordance with the stated terms of the VDCTA Agreements. The term of the VDCTA Agreements is while Mr. Saucier’s application for licensure with the NGC is pending.
19
The VDCTA Agreements were made and entered into by and among Triangulum, a limited liability company of which the managing member is Mr. Saucier, and each of the Recipients. Prior to the VDCTA Agreements, Triangulum owned and controlled shares equal to approximately 60.12% of our total issued and outstanding common stock.
The Recipients of the voting and dispositive control of the shares under the VDCTA Agreements are as follows:
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
|
|
|
Messrs. Lipparelli, Waters, DesRosiers and Zender are members of our Board. During the term of the VDCTA Agreements, Triangulum granted an irrevocable proxy to each of the Recipients to vote the23,271,667 shares of our common stock coveredheld by Triangulum Partners, LLC (“Triangulum”), an entity controlled by Robert B. Saucier, Galaxy Gaming's founder, and, prior to the VDCTA Agreements,redemption, the holder of a majority of our outstanding common stock. Our Articles of Incorporation (the “Articles”) provide that if certain events occur in relation to a stockholder that is required to undergo a gaming suitability review or similar investigative process, we have the option to purchase all or any part of such stockholder’s shares at a price per share that is equal to the average closing share price over the thirty calendar days preceding the purchase. The average closing share price over the thirty calendar days preceding the redemption was $1.68 per share.
The consideration owed to Triangulum for the redemption is $39,096,401 (the “Redemption Consideration Obligation”). See Note 10.
There is ongoing litigation between the Company and conveyedTriangulum related to each Recipient the rightredemption and other matters. See Note 11.
Membership Interest Purchase Agreement. On February 25, 2020, Galaxy Gaming entered into a Membership Interest Purchase Agreement, dated February 25, 2020 (the “Purchase Agreement”), between the Company and the membership interest holders of Progressive Games Partners, LLC (“PGP”).
On August 21, 2020, the Company entered into a First Amendment to “Transfer” the shares, defined as a “sale, transfer, tender, assignment, encumbrance, gift, pledge, hedge, swap, orPurchase Agreement between the Company and the membership interest holders of PGP. The First Amendment, among other disposition, directly or indirectly”things, fixed the cash portion of the purchase price at $6.425 million and established that the stock portion would be satisfied through the issuance of 3,141,361 shares of the Company’s common stock with a value of $1.27 per share on the date of the acquisition. The shares issued are being held in escrow with Philadelphia Stock Transfer, Inc., the Company’s stock transfer agent. The shares will be released to the sellers in August 2022.
On August 21, 2020, the Company completed the acquisition of 100% of the member interests in PGP. The entirety of the purchase price ($10,414,528) has been allocated to customer relationships and is included in Other intangible assets, net, on the Company’s balance sheet. See Note 7. The Company also acquired certain receivables and payables in the net amount of $581,885, which was to be remitted to the sellers of PGP as the receivables and payables were settled. As of December 31, 2020, the remaining balance owed to the sellers was $76,053.
Management has determined that, for accounting purposes, the PGP transaction does not meet the definition of a business combination and, therefore, has been accounted for as an asset acquisition.
COVID-19. On March 11, 2020, the World Health Organization declared a pandemic related to the COVID-19 outbreak, which led to a global health emergency. The public-health impact of the outbreak continues to remain largely unknown and still evolving. The related health crisis could continue to adversely affect the global economy, resulting in continued economic downturn that could impact demand for our products.
On March 17, 2020, the Company announced that it suspended billing to customers who had closed their doors due to the COVID-19 outbreak. As a result, we did not earn revenue for the use of our games by our physical casino customers during the time that they were closed. In general, the online gaming customers who license our games through our distributor remained and continue to remain in operation in spite of the COVID-19 crisis. We earned revenue from them during the crisis and expect to continue to do so, but potentially at levels that may be lower than we previously received.
Given the uncertainties around casino re-openings, we instituted a phased billing approach for our clients through fiscal year 2020, which resulted in us realizing substantially less revenue than we might otherwise expect. In addition, because of COVID-19-related
23
financial pressures on our physical casino customers, there can be no assurance that our accounts receivable will be paid timely for revenues earned prior to the shutdowns. Finally, the Company was notified by some of the land-based casinos that they would be extending their payment terms.
We also rely on third-party suppliers and manufacturers in China, many of whom were shut down or severely cut back production during some portion of 2020. Although this has not had a material effect on our supply chain, any right or interest therein.future disruption of our suppliers and their contract manufacturers may impact our sales and operating results going forward.
Because of the uncertainties of COVID-19, the Company drew on its Revolving Loan in the amount of $1,000,000 on March 12, 2020. Also, on April 17, 2020, the Company obtained the Paycheck Protection Program (the “PPP Loan”) pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Paycheck Protection Program Flexibility Act (the “Flexibility Act”). On July 16, 2020, the Company filed an application and supporting documentation for forgiveness in full of the PPP Loan. On November 21, 2020, the Company received notification the PPP Loan had been forgiven in full, including $4,943 in accrued interest. Pursuant to the CARES Act, the Federal Reserve created the Main Street Priority Loan Program (“MSPLP”) to provide financing for small and medium-sized businesses. On October 26, 2020, the Company borrowed $4 million from Zions Bancorporation N.A., dba Nevada State Bank under this program. See Note 10.
Credit Agreement Amendments. See Note 10 for discussion of amendments made to the Company’s credit agreement.
NOTE 3.2. SIGNIFICANT ACCOUNTING POLICIES
This summaryBasis of our significant accounting policies is presented to assist in understanding our financial statements. presentation. The accompanying consolidated financial statements and notes are representations of our management team, who are responsible for their integrity and objectivity. Thesehave been prepared in accordance with generally accepted accounting policies conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently applied to the preparation of the financial statements.
Basis of presentation. The accompanying financial statements have been prepared in accordance with U.S. GAAP and the rules of the Securities and regulationsExchange Commission (“SEC”). In the opinion of management, the SEC. Theaccompanying consolidated financial statements contain all necessary adjustments (including all those of a recurring nature and those necessary in order for the financial statements to be not misleading) and all disclosures to present fairly our financial position and the results of our operations and cash flows for the periods presented reflect all normal and recurring adjustments that management considers necessary for a fair presentation of operating results..
Basis of accounting.The financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP. Revenues
Use of estimates and assumptions. We are recognizedrequired to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as income when earneda whole, and information available from other outside sources. Our estimates affect reported amounts for assets, liabilities, revenues, expenses and related disclosures. Actual results may differ from initial estimates.
Consolidation. The financial statements are recognized when they are incurred. We do notpresented on a consolidated basis and include the results of the Company and its wholly owned subsidiary, PGP. All intercompany transactions and balances have significant categories of cost of revenues. Expenses such as wages, consulting expenses, legal, regulatorybeen eliminated in consolidation.
Reclassifications. Certain accounts and professional fees and rent are recorded whenfinancial statement captions in the expense is incurred.prior periods have been reclassified to conform to the current period financial statement presentations.
Cash and cash equivalents. We consider cash on hand and cash in banks as cash. We consider certificates of deposit and other short-term securities with maturities of three months or less when purchased as cash and cash equivalents. Our cash in bank balances are deposited in insured banking institutions, which are insured up to $250,000 per account. To date, we have not experienced uninsured losses, and we believe the risk of future loss is negligible.
Restricted cash.Accounts receivable and allowance for doubtful accounts. WeAccounts receivable are required by gaming regulationstated at face value less an allowance for doubtful accounts. Accounts receivable are non-interest bearing. The Company reviews the accounts receivable on a monthly basis to maintain sufficient reserves in restricteddetermine if any receivables will potentially be uncollectible. The allowance for doubtful accounts to be used for the purpose of funding payments to winners of our jackpots offered. Compliance with restricted cash requirements for jackpot funding is reported to gaming authorities in various jurisdictions.estimated based on specific customer reviews, historical collection trends and current economic and business conditions.
Inventory. Inventory consists of ancillary products such as signs, layouts and bases for the various games and electronic devices and components to support all our electronic enhancements used on casino table games (“Enhanced Table Systems (Note 4)Systems”), and we maintain inventory levels based on historical and industry trends. We regularly assess inventory quantities for excess and obsolescence primarily based on forecasted product demand. On January 1, 2017, we adopted ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory. As a result, inventoryInventory is now valued at the lower of net realizable value (previously “market”) or cost, which is determined by the average cost method. The adoption of ASU 2015-11 did not have a material effect on our reported financial position, results of operations or cash flows.
Assets deployed at client locations, net. Our Enhanced Table Systems are manufacturedassembled by us and accounted for as inventory until deployed at our casino clients’ premises (Note 6). WhenOnce deployed and placed into service at client locations, the assets are transferred from inventory toand reported as assets deployed at client locations. These assets are stated at cost, net of accumulated depreciation. Depreciation on assets deployed at client locations is calculated using the straight-line method over a three-year period.
2024
Property and equipment, net. Property and equipment are being depreciated over their estimated useful lives (3(three to 5five years) using the straight-line method of depreciation for book purposes (Note 5). Property and equipment are analyzed for potential impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable and exceeds their fair value.
Goodwill. A goodwill balance of $1,091,000 was created as a result of an asset acquisition completed in October 2011 from Prime Table Games, LLC (the “PTG Acquisition”). Goodwill (Note 7) is assessed for impairment at least annually or at other times during the year if events or circumstances indicate that it is more likely than not that the fair value of a reporting unitasset is below the carrying amount. If found to be impaired, the carrying amount will be reduced, and an impairment loss will be recognized.The Company performed a qualitative evaluation of goodwill impairment on December 31, 2020 and determined it was necessary to also perform a quantitative assessment to determine the existence and extent of impairment. The quantitative analysis concluded that the fair value of the Company’s reporting unit exceeded its carrying value. As a result, no impairment was recorded for the year ended December 31, 2020.
Other intangible assets, net. TheseThe following intangible assets have finite lives and are being amortized using the straight-line method over their estimated economic lives:lives as follows:
Patents |
|
|
Client relationships |
|
|
Trademarks |
|
|
Non-compete agreements |
|
|
Internally-developed software |
|
|
Other intangible assets (Note 7) are analyzed for potential impairment at least annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable and exceeds theirthe fair value, which is the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the intangible assets. ThereAt December 31, 2020, the Company evaluated whether certain long-lived asset groups were recoverable by comparing the carrying value of those asset groups to their expected undiscounted future cash flows and determined that such asset groups were recoverable. As a result, no events orimpairment was recorded for the year ended December 31, 2020.
Interest rates swap agreement. The Company has entered into an interest rate swap agreement to reduce the impact of changes in circumstances that would indicateinterest rates on its floating rate long-term debt. The interest rate swap agreement matures May 1, 2021. The interest rate swap has not been designated a possible impairment ashedging instrument and is adjusted to fair value through earnings in the Company’s statements of December 31, 2017. operations.
Fair value of financial instruments. We estimate fair value for financial assets and liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (ASC 820) (“ASC 820”). ASC 820 defines fair value, provides guidance for measuring fair value, requires certain disclosures and discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The estimated fair values of cash equivalents, restricted cash, accounts receivable and accounts payable approximate their carrying amountamounts due to their short-term nature. The estimated fair value of our long-term debt and capital lease obligations approximates theirits carrying value based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk. As of December 31, 2017,2020, the six-year common stock warrants issued to the lenders of the August 2016 $10,500,000 Term Loan (the “Term Loan”) to purchase 1,965,780 shares of our common stock (the “Warrants”) wereinterest rate swap agreement was the only financial instrument measured at estimated fair value on a recurring basis based on valuation reports provided by counterparties, which are classified as level 2 inputs (Note 14).inputs.
Leases. Leases. We recognizeaccount for lease components (such as rent payments) separately from non-lease components (such as common-area maintenance costs, real estate and sales taxes and insurance costs). Operating and finance leases with terms greater than 12 months are recorded on the balance sheet as right-of-use assets with corresponding right-of-use liabilities. Lease expense for operating leasesis recognized on a straight-line basis (includingusing the effect of reduceddiscount rate implicit in each lease or free rent and rent escalations) over the applicableour incremental borrowing rate at lease term. The difference between the cash paid to the landlord and the amount recognized as rent expense on a straight-line basis is included in deferred rent. In April 2014, the landlord of our corporate headquarters financed leasehold improvements in the amount of $150,000, which have been recorded as a capital lease and amortized over the initial term of the leasecommencement date (Note 9).
Revenue recognition. Revenue is primarily derived from the licensing ofWe account for our products and intellectual property. Consistentrevenue in accordance with our strategy, revenue is generated from negotiated month-to-month recurring licensing fees or the performance of our products, or both. We also, occasionally, receive a one-time sale of certain products and/or reimbursement of our manufactured equipment.
Revenue is recognized when it is earned. Depending upon the product and negotiated terms, our clients may be invoiced monthly in advance, monthly in arrears or quarterly in arrears for the licensing of our products. If billed in advance, the advance billings are recorded as deferred revenue until earned. If billed in arrears, we recognize revenue upon invoicing at the subsequent date. Generally, we begin earning revenue with the installation or “go live” date of the associated product in our clients’ establishment. The monthly recurring invoices are based on executed agreements with each client. Additionally, clients may be invoiced for product sales at the time of shipment or delivery of the product.
21
Revenue from the sale of our products is recognized when the following criteria are met:
(1) Persuasive evidence of an arrangement between us and our client exists;
(2) Shipment has occurred;
(3) The price is fixed and or determinable; and
(4) Collectability is reasonably assured or probable.
In May 2014, the Financial Accounting Standards Board (the “Codification Topic 606, FASB”) issued ASU No. 2014-09 (Topic 606), Revenue from Contracts with Customers(“ASC 606”), which is a comprehensive new revenue recognition standard that will supersede virtually all existing revenue guidance, including industry-specific guidance. We have evaluated the potential impact of adopting ASC 606 when it becomes effective January 1, 2018 (see “New accounting standards not yet adopted” below). See Note 3.
Costs of ancillary products and assembled components. Ancillary products include paytablespay tables (display of payouts), bases, layouts, signage and other items as they relate to support of specific proprietary games in connection with the licensing of our games. Assembled components represent the cost of the equipment, devices and incorporated software used to support our Enhanced Table Systems.
25
Research and development. We incur research and development (“R&D”) costs to develop our new and next-generation products. Our products reach commercial feasibility shortly before the products are released, and therefore R&D costs are expensed as incurred. Employee related costs associated with product development are included in R&D costs.
Foreign currency transactions.translation. We recordThe functional currency for PGP is its local currency, the Euro. Gains and losses resulting from the remeasurement of foreign currency transactions atamounts to the exchange rate prevailing at the date of the transaction. Subsequent exchange gains and losses from foreignfunctional currency remeasurements are included in other income (expense) of ouror expense in the consolidated statements of operations.operations. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in accumulated other comprehensive income or loss in the consolidated statements of changes in stockholders’ deficit
Income taxes.We are subject to income taxes in both the United States and in certain non-U.S. jurisdictions. We account for income taxes in accordance with ASC Topic 740, Income Taxes.We useTaxes (“ASC 740”) using the asset and liability method of accounting for income taxes.method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry-forwards. These temporary differences will result in deductible or taxable amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some or all of the deferred tax assets may not be realized. Adjustments to the valuation allowance increase or decrease our income tax provision or benefit. To the extent we believe that recovery is not more likely than not, we establish a valuation allowance against these deferred tax assets. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. As of December 31, 2017 and 2016,2020, we did record a full valuation allowance against certain deferred assets. We did not record a valuation allowance.allowance as of December 31, 2019.
We recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position (Note 13).
Judgment is required in determining the provision for incomes taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, our tax returns are subject to audit by various tax authorities. Although we believe that our estimates are reasonable, actual results could differ from these estimates. We recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on an evaluation of the technical merits of the position, which requires a significant degree of judgment (Note 13).
Net income (loss) per share. Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares issued and outstanding during the year. Diluted net income per share is similar to basic, except that the weighted-average number of shares outstanding is increased by the potentially dilutive effect of outstanding stock options and restricted stock, and warrants, if applicable, during the year, using the treasury stock method. The effect of outstanding stock options, restricted stock and warrants isAt December 31, 2020, 769,345 dilutive shares were excluded from the computation ofdiluted net loss per share for the year ended December 31, 2017 as the effect is anti-dilutive.calculation.
Segmented Information. We define operating segments as components of our enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. We currently operate our business as one operating segment which generates revenue from the licensing of intellectual property.
Share-based compensation. We recognize compensation expense for all restricted stock and stock option awards made to employees, directors and independent contractors. The fair value of restricted stock is measured using the grant date trading price of our stock. The fair value of stock option awards (Note 14)13) is estimated at the grant date using the Black-Scholes option-pricing model, and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period. We have elected to recognize compensation expense for all options with graded vesting on a straight-line basis over the vesting period of the entire option. The determination of fair value using the Black-Scholes pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behaviors. We estimate volatility based on historical volatility of our
22
common stock, and estimate the expected term based on several criteria, including the vesting period of the grant and the term of the award. We estimate employee stock option exercise behavior based on actual historical exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options.
Share based compensation is recognized only for those awards that are ultimately expected to vest, and we have applied or estimated forfeiture rate to unvested awards for purposes of calculating compensation costs. These estimates will be revised in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs.
Common stock warrants. We account for common stock warrants (Note 14) pursuant to the applicable guidance on accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, on the understanding that in compliance with applicable securities laws, registered warrants require the issuance of unregistered securities upon exercise. We classify the warrants on the balance sheet as a long-term liability, which is revalued at each balance sheet date subsequent to the initial issuance. Determining the appropriate fair-value model and calculating the fair value of warrants requires considerable judgment, including estimating stock price volatility and expected warrant life. We develop our estimates based on historical data. A small change in the estimates used may have a relatively large change in the estimated valuation. We use the Black-Scholes pricing model to value the registered warrants. Changes in the fair market value of the Warrants are reflected in the statement of operations as “Change in estimated fair value of warrant liability.” No warrants have been exercised as of December 31, 2017.
Use of estimates and assumptions. We are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our company and the industry as a whole, and information available from other outside sources. Our estimates affect reported amounts for assets, liabilities, revenues, expenses and related disclosures. Actual results may differ from initial estimates.
Recently adopted accounting standards
Inventory.standards. Fair Value Measurement. In July 2015,August 2018, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU No. 2015-11, Inventory: Simplifying2018-13 addresses the Measurement of Inventory. Inventory is now required disclosures around fair value measurement, removes certain disclosure requirements related to be measuredthe fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the lowerend of cost or net realizablethe reporting period and the range and weighted average of significant unobservable inputs used
26
to develop Level 3 fair value whilemeasurements. We have adopted the concept of market value will be eliminated. The ASU defines net realizable value as the estimated selling process in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. We adopted ASU 2015-11new standard effective January 1, 2017 using the required prospective adoption approach,2020, which did not have a material effect on our financial condition, results of operationsstatements or cash flows.related disclosures.
Stock-based compensation. In March 2016, the FASB issued No. ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. We adopted ASU 2016-09 effective January 1, 2017 using the prospective adoption approach, which did not have a material impact on our financial condition, results of operations or cash flows.
New accounting standards not yet adopted
Revenue Recognition. adopted. Financial Instruments – Credit Losses. In May 2014,February 2020, the FASB issued ASU No. 2014-092020-02, Financial Instruments – Credit Losses (Topic 606), 326).Revenue from Contracts with Customers, which is a comprehensive new revenue recognition standard that will supersede virtually all existing revenue ASU 2020-02 provides updated guidance including industry-specific guidance. Under the new standard, revenue will be recognized when control of the promised goods or services is transferred to customers inon how an amount that reflects the consideration to which we expect to be entitled in exchange for those goodsentity should measure credit losses on financial instruments and services. The standard creates a five-step model that will generally require companies to use more judgment and make more estimates than under current guidance when considering the terms of contracts along with all relevant facts and circumstances. These include the identification of customer contracts and separating performance obligations, the determination of transaction price that potentially includes an estimate of variable consideration, allocating the transaction price to each separate performance obligation, and recognizing revenue in line with the pattern of transfer.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defersdelayed the effective date of ASU 2014-09 by one year to now be effectiveTopic 326 for fiscal years, and interimsmaller reporting periods within those years, beginning after December 15, 2017. We will adopt ASC 606 on its effective date of January 1, 2018 using the modified retrospective approach (reporting the cumulative effect as of the date of adoption).
The primary impacts of the adoption of ASC 606 on our financial statements are the following: (a) revenues generated by our European distributors (which sublicense our intellectual properties to gaming establishments in Europe in accordance with license agreements entered into between us and such distributors) will be presented as gross revenue under the caption “product leases and royalties” and fees earned by such distributors will be presented as selling, general and administrative expenses. Currently, revenues generated by our European distributors are presented net of fees earned under the caption “product leases and royalties;” and (b) prepayments from customer in advance of the period that the revenue is recognized were historically recorded under the caption
23
“deferred revenue” in the accompanying balance sheet. This caption will be renamed “contract liability” in accordance with the requirements of ASC 606.
We have determined that, as a result of adopting ASC 606, our revenue for the year ended December 31, 2017 will increase by $695,199, with a corresponding increase to selling, general and administrative expense. There is no impact expected on net income for the year ended December 31, 2017.
Despite the immaterial impact of the adoption of ASC 606 on our financial statements, the adoption of ASC 606 will significantly increase revenue disclosure requirements.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amended guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The adoption of this guidance is expected to result in a significant portion of our operating leases being recognized on our balance sheets. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective forcompanies until fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with earlier adoption permitted. We are currently evaluating the impact of adopting this guidance.
Restricted Cash. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires amounts generally described as restricted cash and cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. Upon the adoption of ASU 2016-08, restricted cash will be included within beginning and ending cash and cash equivalents amounts on our statements of cash flows, which we do not expect will have a material impact on our financial statements.
Goodwill Impairment. In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. This guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied on a prospective basis.2022. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of adopting this guidance.
Compensation - Stock Compensation. In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This guidance is effective for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years, with early adoption permitted. We will adopt the guidance on January 1, 2018, as required, and do not believe the adoption of this guidance will have a material impact on our financial statements.statements or related disclosures.
Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 includes several provisions aimed at reducing the complexity of accounting for income taxes, with the goal of increased consistency for the application of ASC 740. The simplifications cover certain aspects of intraperiod tax allocations, interim provisions and accounting for ownership changes of foreign entities as well as modifications to the calculation of income taxes in jurisdictions that have both income and non-income based measures. ASU 2019-12 also includes guidance on when a step-up in goodwill is the result of a separate transaction rather than part of a business combination and guidance for preparing separate company financials. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We do not believe the adoption of this guidance will have a material impact on our financial statements or related disclosures.
NOTE 3. REVENUE RECOGNITION
Revenue recognition. We generate revenue primarily from the licensing of our intellectual property. We recognize revenue under recurring fee license contracts monthly as we satisfy our performance obligation, which consists of granting the customer the right to use our intellectual property. Amounts billed are determined based on flat rates or usage rates stipulated in the customer contract.
Disaggregation of revenue
The following table disaggregates our revenue by geographic location for the years ended December 31, 2020 and 2019:
|
| 2020 |
|
| 2019 |
| ||
North America and Caribbean |
| $ | 5,757,143 |
|
| $ | 15,387,519 |
|
Europe, Middle East and Africa |
|
| 4,473,173 |
|
|
| 5,913,477 |
|
Total revenue |
| $ | 10,230,316 |
|
| $ | 21,300,996 |
|
Contract liabilities. Amounts billed and cash received in advance of performance obligations fulfilled are recorded as contract liabilities and recognized as performance obligations are fulfilled.
Contract Assets. The Company’s contract assets consist solely of unbilled receivables which are recorded when the Company recognizes revenue in advance of billings. Unbilled receivables totaled $502,860 and $352,899 for the years ended December 31, 2020 and 2019 and are included in the accounts receivable balance in the accompanying balance sheets.
NOTE 4. INVENTORY
Inventory net consisted of the following as of December 31, 20172020 and 2016:2019:
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Raw materials and component parts |
| $ | 235,673 |
|
| $ | 171,478 |
|
| $ | 300,244 |
|
| $ | 322,349 |
|
Work-in-process |
|
| 214,895 |
|
|
| 151,671 |
| ||||||||
Finished goods |
|
| 103,558 |
|
|
| 128,956 |
|
|
| 368,281 |
|
|
| 343,305 |
|
Inventory, gross |
|
| 554,126 |
|
|
| 452,105 |
| ||||||||
Less: inventory reserve |
|
| (30,000 | ) |
|
| (25,000 | ) | ||||||||
Inventory, net |
| $ | 524,126 |
|
| $ | 427,105 |
|
| $ | 668,525 |
|
| $ | 665,654 |
|
24
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment net consisted of the following at December 31, 20172020 and 2016:2019:
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Furniture and fixtures |
| $ | 280,694 |
|
| $ | 269,471 |
|
| $ | 312,639 |
|
| $ | 312,639 |
|
Automotive vehicles |
|
| 215,127 |
|
|
| 202,143 |
|
|
| 215,127 |
|
|
| 215,127 |
|
Office and computer equipment |
|
| 332,544 |
|
|
| 302,296 |
| ||||||||
Leasehold improvements |
|
| 156,843 |
|
|
| 156,843 |
|
|
| 32,547 |
|
|
| 6,843 |
|
Computer equipment |
|
| 121,992 |
|
|
| 105,114 |
| ||||||||
Office equipment |
|
| 53,483 |
|
|
| 37,871 |
| ||||||||
Property and equipment, gross |
|
| 828,139 |
|
|
| 771,442 |
|
|
| 892,857 |
|
|
| 836,905 |
|
Less: accumulated depreciation |
|
| (564,272 | ) |
|
| (415,189 | ) |
|
| (776,133 | ) |
|
| (691,996 | ) |
Property and equipment, net |
| $ | 263,867 |
|
| $ | 356,253 |
|
| $ | 116,724 |
|
| $ | 144,909 |
|
For the yearsyear ended December 31, 20172020 and 2016,2019, depreciation expense related to property and equipment was $149,085$90,979 and $133,381,$146,341, respectively.
Property and equipment, net included $156,843 of leasehold improvements acquired under capital leases as of December 31, 2017 and 2016. Accumulated depreciation of assets acquired under capital leases totaled $113,035 and $82,183 at December 31, 2017 and 2016, respectively (Note 9).
NOTE 6. Assets deployed at client locations net
Assets deployed at client locations, net consisted of the following at December 31, 20172020 and 2016:2019:
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Enhanced table systems |
| $ | 638,981 |
|
| $ | 424,364 |
|
| $ | 890,560 |
|
| $ | 993,127 |
|
Less: accumulated depreciation |
|
| (265,331 | ) |
|
| (212,233 | ) |
|
| (658,404 | ) |
|
| (587,605 | ) |
Assets deployed at client location, net |
| $ | 373,650 |
|
| $ | 212,131 |
|
| $ | 232,156 |
|
| $ | 405,522 |
|
For the yearsyear ended December 31, 20172020 and 2016,2019, depreciation expense related to assets deployed at client locations netwas was $121,278$222,204 and $58,035,$275,924, respectively.
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS NET
Goodwill and finite-lived IntangibleGoodwill. A goodwill balance of $1,091,000 was created as a result of an asset acquisition completed in October 2011 from Prime Table Games, LLC.
Other intangible assets, net. Other intangible assets, net consisted of the following at December 31, 20172020 and 2016:2019:
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Goodwill |
| $ | 1,091,000 |
|
| $ | 1,091,000 |
| ||||||||
Finite-lived intangible assets: |
|
|
|
|
|
|
|
| ||||||||
Patents |
|
| 13,475,000 |
|
|
| 13,475,000 |
|
| $ | 13,507,997 |
|
| $ | 13,485,000 |
|
Customer relationships |
|
| 3,400,000 |
|
|
| 3,400,000 |
|
|
| 13,942,115 |
|
|
| 3,400,000 |
|
Trademarks |
|
| 2,880,967 |
|
|
| 2,880,967 |
|
|
| 2,880,967 |
|
|
| 2,880,967 |
|
Non-compete agreements |
|
| 660,000 |
|
|
| 660,000 |
|
|
| 660,000 |
|
|
| 660,000 |
|
Internally-developed software |
|
| 102,968 |
|
|
| — |
|
|
| 183,415 |
|
|
| 183,415 |
|
Other intangible assets, gross |
|
| 20,518,935 |
|
|
| 20,415,967 |
|
|
| 31,174,494 |
|
|
| 20,609,382 |
|
Less: accumulated amortization |
|
| (10,157,126 | ) |
|
| (8,660,948 | ) |
|
| (15,087,598 | ) |
|
| (13,178,739 | ) |
Other intangible assets, net |
|
| 10,361,809 |
|
|
| 11,755,019 |
|
| $ | 16,086,896 |
|
| $ | 7,430,643 |
|
Goodwill and other intangible assets, net |
| $ | 11,452,809 |
|
| $ | 12,846,019 |
|
For the years ended December 31, 20172020 and 2016,2019, amortization expense related to the finite-lived intangible assets was $1,496,177$1,908,858 and $1,506,617$1,517,009 respectively.
25The increase in customer relationships was the result of acquiring customer contracts/agreements valued at $10.4 million in connection with the closing on the Purchase Agreement in August 2020.
28
Estimated future amortization expense to be recorded for the twelve months ending 2018 through 2022 and thereafter areis as follows:
December 31, |
| Total |
| |||||
2018 |
| $ | 1,498,874 |
| ||||
2019 |
|
| 1,498,874 |
| ||||
2020 |
|
| 1,454,798 |
| ||||
Year Ended December 31, |
| Total |
| |||||
2021 |
|
| 1,391,218 |
|
| $ | 2,594,767 |
|
2022 |
|
| 1,106,104 |
|
|
| 2,296,563 |
|
2023 |
|
| 1,430,276 |
| ||||
2024 |
|
| 1,427,276 |
| ||||
2025 |
|
| 1,424,276 |
| ||||
Thereafter |
|
| 3,411,941 |
|
|
| 6,913,738 |
|
Total amortization |
| $ | 10,361,809 |
|
| $ | 16,086,896 |
|
NOTE 8. ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 20172020 and 2016:2019:
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Share redemption consideration |
| $ | 510,776 |
|
| $ | 510,776 |
| ||||||||
Commissions and royalties |
|
| 398,096 |
|
|
| 78,528 |
| ||||||||
Payroll and related |
| $ | 712,584 |
|
| $ | 405,553 |
|
|
| 173,487 |
|
|
| 747,458 |
|
Professional fees |
|
| 63,488 |
|
|
| 59,567 |
| ||||||||
Commissions and royalties |
|
| 65,380 |
|
|
| 54,551 |
| ||||||||
TableMAX license fee |
|
| — |
|
|
| 470,512 |
| ||||||||
Income tax payable |
|
| 95,879 |
|
|
| 64,832 |
| ||||||||
Interest |
|
| 42,218 |
|
|
| 9,895 |
| ||||||||
Other |
|
| 46,344 |
|
|
| 119,245 |
|
|
| 65,877 |
|
|
| 39,390 |
|
Total accrued expenses |
| $ | 887,796 |
|
| $ | 1,109,428 |
|
| $ | 1,286,333 |
|
| $ | 1,450,879 |
|
TableMAX license fee. Under the terms of the TMAX Agreement, we hold exclusive worldwide rights (excluding one international territory and two U.S. states) to the TMAX electronic gaming platform and certain related game titles. Pursuant to the terms of the TMAX Agreement, the licensee fee payable to TMAX is dependent upon our generating profitable operating results specifically from the use of TMAX products. To the extent there are net profits (as defined in the TMAX Agreement), a percentage of such net profits is payable to TMAX depending on the number of TMAX product installations. Effective December 29, 2017, we entered into the First Amendment to the TMAX Agreement with TMAX to, among other things, allow us to retain all net profits generated after the date of the First Amendment and terminate the TMAX Agreement effective upon the earliest of (1) December 31, 2019; (2) termination of game placements at the remaining TableMAX clients; or (3) regulatory approval received by TMAX to service the remaining clients independently. In January 2018, in connection with the First Amendment and the Settlement and Release Agreement, we paid the previously accrued amount of $774,645 to an assignee of TMAX. As such, the liability was reclassified to accounts payable from accrued expenses as of December 31, 2017.
NOTE 9. CAPITAL LEASE OBLIGATIONSLEASES
CapitalWe have operating leases for our corporate office, two satellite facilities in the state of Washington and for certain equipment. We account for lease obligationscomponents (such as rent payments) separately from the non-lease components (such as common-area maintenance costs, real estate and sales taxes and insurance costs). The discount rate represents the interest rate implicit in each lease or our incremental borrowing rate at lease commencement date.
As of December 31, 2020, our leases have remaining lease terms ranging from 3 months to 72 months.
Supplemental balance sheet information related to leases is as follows:
|
| As of December 31, 2020 | ||||
| Amount |
|
| Classification | ||
Operating leases: |
|
|
|
|
|
|
Operating lease right-of-use lease assets |
| $ | 1,367,821 |
|
|
|
|
|
|
|
|
|
|
Operating lease current liabilities |
| $ | 195,411 |
|
| Current portion of operating lease liabilities |
|
|
|
|
|
|
|
Operating lease long-term liabilities |
|
| 1,215,680 |
|
| Long-term operating lease liabilities |
|
|
|
|
|
|
|
Total operating lease liabilities |
| $ | 1,411,091 |
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term: |
|
|
|
|
|
|
Operating leases |
| 5.9 years |
|
|
| |
|
|
|
|
|
|
|
Weighted-average discount rate: |
|
|
|
|
|
|
Operating leases |
|
| 4.2 | % |
|
|
The components of lease expense are as follows:
|
| Year Ended December 31, 2020 | ||||
|
| Amount |
|
| Classification | |
Operating lease cost |
| $ | 350,052 |
|
| Selling, general and administrative expense |
Supplemental cash flow information related to leases is as follows:
|
| Year Ended December 31, 2020 | ||||
|
| Amount |
|
| Classification | |
Cash paid for amounts included in the measure of lease liabilities: |
|
|
|
|
|
|
Operating cash flows from operating leases |
| $ | 287,582 |
|
| Net income |
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities: |
|
|
|
|
|
|
Operating leases |
| $ | 1,390,002 |
|
| Supplemental cash flow information |
As of December 31, 2020, future maturities of our operating lease liabilities are as follows:
Year Ended December 31, |
| Amount |
| |
| $ | 195,411 |
| |
2022 |
|
| 208,656 |
|
2023 |
|
| 222,248 |
|
2024 |
|
| 240,034 |
|
2025 |
|
| 261,148 |
|
Thereafter |
|
| 283,594 |
|
Total lease liabilities |
| $ | 1,411,091 |
|
On July 3, 2020, we entered into a new 75-month lease for our corporate headquarters in Las Vegas. Pursuant to the new lease, we now occupy approximately 14,000 square feet of office and warehouse space. The lease commenced on October 1, 2020, with rent abated through the remainder of 2020. Early occupancy was granted on September 15, 2020. Therefore, the right-of-use asset and corresponding liability were recorded on this date. Beginning in January 2021, we will commence paying rent and common area charges in an amount that is approximately equal to what we were paying pursuant to our previous lease.
NOTE 10. LONG-TERM LIABILITIES
Long-term liabilities consisted of the following at December 31, 20172020 and 2016:2019:
|
| 2017 |
|
| 2016 |
| ||
Capital lease obligation |
| $ | 47,002 |
|
| $ | 78,008 |
|
Less: Current portion |
|
| (32,785 | ) |
|
| (31,030 | ) |
Total capital lease obligations – long-term |
| $ | 14,217 |
|
| $ | 46,978 |
|
|
| 2020 |
|
| 2019 |
| ||
Nevada State Bank credit agreement |
| $ | 8,413,184 |
|
| $ | 8,699,900 |
|
Main Street Priority Loan |
|
| 4,000,000 |
|
|
| — |
|
Redemption Consideration Obligation |
|
| 39,096,401 |
|
|
| 39,096,401 |
|
Vehicle notes payable |
|
| 22,614 |
|
|
| 44,490 |
|
Insurance notes payable |
|
| 519,194 |
|
|
| 177,894 |
|
Long-term debt, gross |
|
| 52,051,393 |
|
|
| 48,018,685 |
|
Less: Unamortized debt issuance costs |
|
| (137,817 | ) |
|
| (93,144 | ) |
Long-term liabilities, net of debt issuance costs |
|
| 51,913,576 |
|
|
| 47,925,541 |
|
Less: Current portion |
|
| (2,222,392 | ) |
|
| (1,634,527 | ) |
Long-term debt, net |
| $ | 49,691,184 |
|
| $ | 46,291,014 |
|
Share Redemption Consideration Obligation. On May 6, 2019, we issued a promissory note in the face amount of $39,096,401 to Triangulum in connection with the share redemption disclosed in Note 1. In the litigation that followed the share redemption (Note 11), Triangulum is disputing, among other things, the validity of the note and has not accepted its terms. Because Triangulum disputes the promissory note issued by the Company and its terms, the promissory note has not been given accounting effect in the Company’s financial statements. The capital leaseCompany has instead recorded a long-term obligation requires 60 monthly paymentspayable to Triangulum, based on the redemption value specified in our Articles of $2,879,Incorporation. The obligation is classified as long-term because we do not expect that a final agreement with respect to the litigation will be reached between the parties in the next twelve months. We may repay the Redemption Consideration Obligation at any time but no later than May 6, 2029; however, there can be no assurance that Triangulum will accept such payments. Additional share redemption consideration is being accrued at 2% on the Redemption Consideration Obligation, and we paid the first annual payment on May 5, 2020, in the amount of $781,928, which was accepted by Triangulum. The Redemption Consideration Obligation is unsecured and is subordinated to our existing and future indebtedness.
30
Nevada State Bank (“NSB”) Credit Agreement. The Company is party to a Credit Agreement with Zions Bancorporation, N.A. dba Nevada State Bank (as amended, the “Credit Agreement”), which was last amended on November 16, 2020. The Credit Agreement provides for a Term Loan in the initial amount of $11,000,000 and a Revolving Loan in the amount of $1,000,000. On March 12, 2020, the Company drew down $1,000,000 on the Revolving Loan component of the Credit Agreement. At December 31, 2020, the principal amount outstanding under the Term Loan component of the Credit Agreement was $7,265,300, bringing the total amount outstanding under the Credit Agreement at December 31, 2020, to $8,265,300.
Under the Credit Agreement, outstanding balances accrue interest based on one-month U.S. dollar London interbank offered rate (“LIBOR”) plus an Applicable Margin of 3.50% or 4.00%, depending on our Total Leverage Ratio (as defined in the amended Credit Agreement). Effective December 31, 2021, LIBOR will no longer serve as a reference rate for bank loans, among other investment classes. The Fourth Amendment to the Credit Agreement stipulates that an alternative reference rate will be selected and used in lieu of LIBOR.
The Credit Agreement, as amended, contains affirmative and negative financial covenants and other restrictions customary for borrowings of this nature. In particular, we are required to make Maintenance Capital Expenditures (as defined in the Credit Agreement) in any fiscal year of no more than 5% of the total revenues realized in the prior fiscal year. At December 31, 2020, we were in compliance with this covenant. In addition, we are required to maintain (i) a minimum trailing-four-quarters Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of 1.25x; (ii) a maximum Total Leverage Ratio (as defined in the Credit Agreement) of 7.25x (with semi-annual step-downs of 0.25x every six months, commencing June 30, 2020 through December 31, 2022 (the current required Total Leverage Ratio is 6.75x) and (iii) a maximum Senior Leverage Ratio (as defined in the Credit Agreement) of 2.00x. We were not in compliance with the Fixed Charge Coverage Ratio, Total Leverage Ratio and Senior Leverage Ratio as of December 31, 2020. In the Forbearance and Fifth Amendment to the Credit Agreement, dated August 14, 2020, (the “Fifth Amendment”), NSB agreed to forbear from exercising any rights or remedies as a result of a default under one or more of these covenants through April 1, 2021. The Fifth Amendment also imposed a new Minimum EBITDA covenant pursuant to which the Company must demonstrate trailing-four-quarter EBITDA of $2.4 million for each of the quarters ended September 30, 2020, December 31, 2020 and March 31, 2021 and $3.0 million thereafter. On November 16, 2020, the Company entered into a Seventh Amendment to the Credit Agreement with Zions Bancorporation N.A., dba Nevada State Bank (the “Seventh Amendment”). The Seventh Amendment changed the trailing-four-quarter Minimum EBITDA covenant from $3.0 million to $2.4 million for each fiscal quarter ending September 30, 2020 and thereafter. The Company was not in compliance with the Minimum EBITDA covenant (as revised in the Seventh Amendment) as of December 31, 2020. As further described in Note 13 “Subsequent Events”, on March 29, 2021, the Company and NSB entered in an Amended and Restated Credit Agreement (the “A&R Agreement”). Among other things, the A&R Agreement extended the forbearance under the Fifth Agreement to the Minimum EBITDA covenant as measured on December 31. 2020. On October 26, 2020, the Company and NSB entered into the Sixth Amendment to Credit Agreement dated August 14, 2018 (the “Sixth Amendment”) in connection with the Company’s borrowing under the MSPLP. The Sixth Amendment added a Minimum Liquidity covenant requiring that the Company have cash and cash equivalents of no less than $1.5 million at quarter ends through and including 5.5% interest, beginningJune 30, 2021, and $2.5 million thereafter. The Company was in compliance with the Minimum Liquidity covenant as of December 31, 2020.
Paycheck Protection Program Borrowings. On April 201417, 2020, the Company obtained an unsecured loan of $835,300 through June 2019.Zions Bancorporation, N.A. dba Nevada State Bank under the PPP Loan pursuant to the CARES Act and the Flexibility Act. The Paycheck Protection Program is administered by the United States Small Business Administration. In accordance with the requirements of the CARES Act, the Company used proceeds from the PPP Loan primarily for payroll costs.
Under the terms of the CARES and Flexibility Acts, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the Paycheck Protection Program. On July 16, 2020, the Company filed an application and supporting documentation for forgiveness in full of the PPP Loan. On November 21, 2020, the Company received notification the PPP Loan had been forgiven in full, including $4,943 in accrued interest.
Mainstreet Priority Loan Borrowings (“MSPLP”). On October 26, 2020, the Company obtained an unsecured loan of $4,000,000 through Zions Bancorporation, N.A. dba Nevada State Bank under section 13(3) of the Federal Reserve Act.
The capital leases cover furnitureMSPLP bears interest at a rate of three-month U.S. dollar LIBOR plus 300 basis points (initially 3.215%), and leasehold improvements locatedinterest payments during the first year will deferred and added to the loan balance. The MSPLP has a five-year final maturity, with 15% of principal amortizing in each of years three and four. The MSPLP, plus accrued and unpaid interest, may be prepaid at our corporate headquartersany time at par. While the MSPLP is outstanding, and for one year after it is repaid in Las Vegas, Nevada. full, the Company may not 1) repurchase stock, pay dividends or make other distributions, or 2) pay compensation to executive officers that exceeds the total compensation they received in 2019. The entire outstanding principal balance of the MSPLP, together with all accrued and unpaid interest, is due and payable in full on October 26, 2025. The terms of the MSPLP provide for customary events of default, including, among others, those relating to a failure to make payment, bankruptcy, breaches of representations and covenants, and the occurrence of certain events. The MSPLP is secured by a
31
security interest in the assets of the Company, which security interest is pari passu with the security interest granted under the Credit Agreement.
As of December 31, 2017, annual requirements for capital leases2020, future maturities of our long-term obligations are as follows:
December 31, |
| Total |
| |
2018 |
| $ | 32,785 |
|
2019 |
|
| 14,217 |
|
Total minimum lease payments |
| $ | 47,002 |
|
December 31, |
| Total |
| |
2021 |
| $ | 2,222,392 |
|
2022 |
|
| 2,637,700 |
|
2023 |
|
| 4,694,900 |
|
2024 |
|
| 600,000 |
|
2025 |
|
| 2,800,000 |
|
Thereafter |
|
| 39,096,401 |
|
Total long-term debt, gross |
| $ | 52,051,393 |
|
26
Long-term debt consisted of the following at December 31, 2017 and 2016:
|
| 2017 |
|
| 2016 |
| ||
Term loan |
| $ | 9,450,000 |
|
| $ | 10,500,000 |
|
Notes payable, related party |
|
| — |
|
|
| 509,135 |
|
Equipment notes payable |
|
| 124,311 |
|
|
| 162,274 |
|
Insurance notes payable |
|
| 73,734 |
|
|
| 36,063 |
|
Notes payable, gross |
|
| 9,648,045 |
|
|
| 11,207,472 |
|
Less: |
|
|
|
|
|
|
|
|
Unamortized debt issuance costs |
|
| (480,397 | ) |
|
| (595,462 | ) |
Warrants issued |
|
| (584,261 | ) |
|
| (743,604 | ) |
Notes payable, net |
|
| 8,583,387 |
|
|
| 9,868,406 |
|
Less: Current portion |
|
| (1,163,002 | ) |
|
| (1,199,255 | ) |
Long-term debt, net |
| $ | 7,420,385 |
|
| $ | 8,669,151 |
|
Term loan credit facility. In August 2016, we entered into a term loan agreement (the “Term Loan Agreement”) for an aggregate principal amount of $10,500,000 (the "Term Loan"). Proceeds of the Term Loan were primarily used to prepay in full the outstanding notes then payable to unrelated parties. The remainder of the proceeds from the Term Loan were used for general corporate purposes and working capital needs. The Term Loan is secured by a senior lien on our assets. In conjunction with the Term Loan, we also entered into a warrant agreement (the “Warrant Agreement”), pursuant to which we issued the lenders a six-year warrant to purchase 1,965,780 shares of our common stock (the “Warrants”). The estimated fair value of the Warrants (Note 14) on the grant date was determined to be $809,632 using the Black-Scholes option pricing model, and was recorded as a reduction of the related debt. The estimated fair value of the Warrants on the grant date is being amortized ratably over the term of the Warrants to interest expense.
Under the Term Loan, we are subject to quarterly financial covenants that, among other things, limit our annual capital expenditures (as defined in the Term Loan agreement), and require us to maintain a specified leverage ratio and minimum EBITDA amount, each of which are defined in the Term Loan agreement. We were in compliance with the financial covenants of the Term Loan Agreement as of December 31, 2017.
During the initial twelve-month period of the Term Loan, the outstanding principal accrued interest at the rate of 14.0% per annum.
Thereafter, the outstanding principal accrues interest at the lesser of 14.0% per annum or 12.5% per annum for any quarterly period in which we achieve a specified leverage ratio. Beginning October 1, 2017, the interest rate per annum decreased to 12.5% due to the achievement of such ratio.
The Term Loan requires quarterly interest-only payments through December 31, 2016 after which we are required to make quarterly principal payments of $262,500 plus accrued interest. The remaining principal and any unpaid interest will be payable in full on August 29, 2021. Voluntary prepayments of the Term Loan, in full or in part, are permitted after the first anniversary of the Term Loan, subject to certain premiums. The Term Loan also requires certain mandatory prepayments in the amount of 100% of the proceeds from certain asset dispositions (other than in the ordinary course of business) and certain other extraordinary events, and 25% of the proceeds from the sale and issuance of capital stock. Substantially all of our assets are pledged as collateral for the Term Loan.
The foregoing summary of the Term Loan Agreement and the Warrant Agreement is qualified in its entirety by reference to the respective agreements, which are found as Exhibits 99.1 and 99.2, respectively, to our Form 8-K filed with the SEC on August 29, 2016.
Notes payable, related party. In connection with an asset acquisition from GGLLC in 2007, we executed a note payable to an entity owned and controlled by Mr. Saucier (the “Related Party Note Payable”). The Related Party Note Payable required annual principal and interest payments of $109,908, at a fixed interest rate of 7.3% through December 2018, at which time there was a balloon payment due of $354,480. On August 11, 2017, we repaid in full the then-outstanding principal balance along with accrued and unpaid interest (in the aggregate amount of $459,683) on the Related Party Note Payable. This payment constituted a Restricted Payment as defined in our Term Loan, and we received a waiver with respect to the payment from the administrative agent for the Term Loan.
27
Maturities of our notes payable as of December 31, 2017 are as follows:
December 31, |
| Total |
| |
2018 |
| $ | 1,163,002 |
|
2019 |
|
| 1,090,553 |
|
2020 |
|
| 1,072,033 |
|
2021 |
|
| 6,322,457 |
|
Total notes payable |
|
| 9,648,045 |
|
Less: |
|
|
|
|
Unamortized debt issuance costs |
|
| (480,397 | ) |
Warrants issued |
|
| (584,261 | ) |
Notes payable, net |
| $ | 8,583,387 |
|
NOTE 11. COMMITMENTS AND CONTINGENCIES
Concentration of risk. We are exposed to risks associated with a clientclients who representsrepresent a significant portion of total revenues. As ofFor the years ended December 31, 20172020 and 2016,2019, respectively, we had the following client revenue concentrations:
|
| Location |
| 2017 Revenue |
|
| 2016 Revenue |
|
Client A |
| North America |
| 13.3% |
|
| 13.4% |
|
The amounts in accounts receivable related to this significant client at December 31, 2017 and 2016 were approximately $161,000 and $210,000, respectively.
We are also exposed to risks associated with expiration of our patents. In 2015, domestic and international patents expired on two of our products, which accounted for approximately $7,176,000 or 48.3% of our revenue for the year ended December 31, 2017, as compared to $5,725,000 or 46% of our revenue for the year ended December 31, 2016. We continue to generate revenue from these products despite the expiration of the underlying patents and, accordingly, we do not expect the expiration of these patents to have a significant adverse impact on our future financial statements.
Operating lease. In February 2014, we entered into a lease (the “Spencer Lease”) for a new corporate office with an unrelated third party. The five-year Spencer Lease is for a building with approximately 24,000 square feet, which is comprised of approximately 16,000 square feet of office space and 8,000 square feet of warehouse space. The property is located in Las Vegas, Nevada.
The initial term of the Spencer Lease commenced on April 1, 2014 and expires on June 30, 2019. We were obligated to pay approximately $153,000 in annual base rent in the first year, and the annual base rent will increase by approximately 4% each year. We are also obligated to pay real estate taxes and other building operating costs. Subject to certain conditions, we have certain rights under the Spencer Lease, including rights of first offer to purchase the premises if the landlord elects to sell. We also have an option to extend the term of the Spencer Lease for two consecutive terms of three years each, at then current fair market value rental rate determined in accordance with the terms of the Lease.
In connection with the Spencer Lease, the landlord agreed to finance tenant improvements of $150,000 (“TI Allowance”). The base rent is increased by an amount sufficient to fully amortize the TI Allowance through the Spencer Lease term upon equal monthly payments of principal and interest, with interest imputed on the outstanding principal balance at the rate of 5.5% per annum. The TI Allowance has been classified as a capital lease on the balance sheet (Note 9).
Total rent expense was $292,227 and $285,814 for the year ended December 31, 2017 and 2016, respectively.
The following table reflects our estimates of lease obligations for the twelve months ending 2018 through 2019 and are based upon our current operating leases. There are currently no operating lease commitments beyond June 30, 2019.
December 31, |
| Annual Obligation |
| |
2018 |
| $ | 234,552 |
|
2019 |
|
| 119,460 |
|
Total obligations |
| $ | 354,012 |
|
|
| Location |
| 2020 Revenue |
|
| 2019 Revenue |
|
| Accounts Receivable December 31, 2020 |
|
| Accounts Receivable December 31, 2019 |
| ||
Client A |
| Europe |
| 21.5% |
|
| 6.1% |
|
| $ | 348,781 |
|
| $ | 101,402 |
|
Legal proceedings.In the ordinary course of conducting our business, we are, from time to time, involved in various legal proceedings, administrative proceedings, regulatory government investigations and other matters, including those in which we are a plaintiff or defendant, that are complex in nature and have outcomes that are difficult to predict. We record accruals for such contingencies
As discussed in Note 1, we redeemed the shares of our common stock held by Triangulum, an entity controlled by Robert B. Saucier, the Company’s founder, and, prior to the extent we concluderedemption, the holder of a majority of our outstanding common stock.
On May 6, 2019, the Company redeemed the shares of our common stock held by Triangulum. Also on May 6, 2019, the Company filed a lawsuit seeking: (i) a declaratory judgment that it is probableacted lawfully and in full compliance with the Articles when it redeemed the Triangulum shares and (ii) certain remedies for breach of fiduciary duty and breach of contract by Triangulum and its Managing Member, Mr. Saucier (the “Triangulum Lawsuit”). The suit alleges that a liability will be incurredthe redemption and the other relief sought by the Company are appropriate and in accordance with the Articles.
The defendants to the Triangulum Lawsuit responded to the complaint, and Triangulum filed counterclaims. Triangulum also filed a Motion seeking a mandatory injunction requiring the Company to either reissue shares to Triangulum or reissue shares to be held in a constructive trust for Triangulum (the “Injunction Motion”). On July 11, 2019, the Nevada district court denied Triangulum’s Injunction Motion, finding, among other things, that the business judgment rule applies to the Board’s redemption decisions and the decisions were in the Company’s best interests. On September 6, 2019, Triangulum appealed the denial of the Injunction Motion to the Nevada Supreme Court. The Company submitted its brief in opposition, and Triangulum filed its reply brief. Recently, on January 13, 2021, the Nevada Supreme Court heard oral argument on Triangulum’s appeal. On March 26, 2021, the Nevada Supreme Court affirmed the ruling of the District Court denying Triangulum’s Injunction Motion, the effect of which is to preclude the re-issuance of any shares of Galaxy stock to Triangulum.
On October 18, 2019, Saucier filed counterclaims against the Company and its Chairman of the Board, Mark Lipparelli, including a breach of contract claim alleging that the Company was obligated to pay Saucier his year-end bonus despite his resignation. The Company and Chairman Lipparelli filed an answer to the counterclaims.
Subsequent to its original counterclaims, Triangulum filed amended counterclaims, which the Company and its Directors moved to dismiss on a number of legal grounds (the “Motion to Dismiss”). The Court denied the Motion to Dismiss. The Company and its Directors filed a writ petition challenging the ruling, which the Nevada Supreme Court denied on January 23, 2020.
On May 6, 2020, Saucier made a demand of the Company under our Bylaws and an Indemnification Agreement between Saucier and the Company, for indemnity and advancement of funds seeking repayment of his attorneys’ fees and expenses he allegedly incurred in connection with the Company’s claims against him in the Triangulum Lawsuit. An independent counsel, selected per the terms of the Indemnification Agreement, concluded that Saucier was entitled to a small amount of indemnity funds related to the time he was employed by the Company, but denied an entitlement to indemnification thereafter.
On May 19, 2020, Saucier commenced a separate action in Nevada district court by filing a complaint he verified as true, seeking advancement of indemnification fees to which he claims an entitlement under the Bylaws and an Indemnification Agreement (the “Advancement Lawsuit”). The Company filed its opposition on June 4, 2020. Saucier’s Motion was denied in a hearing that occurred
32
on June 24, 2020. Saucier filed a notice of his appeal of the Nevada district court’s decision in the Advancement Lawsuit to the Nevada Supreme Court on August 10, 2020. Saucier subsequently moved for attorneys' fees related loss canto the filing of the Advancement Lawsuit, which the Nevada district court granted, and the Company filed a notice of appeal to the Nevada Supreme Court. When Saucier filed a supplemental motion for attorneys’ fees, the Nevada district court denied his motion, finding the fees incurred to be unreasonable, among other things. Saucier also appealed this ruling of the Nevada district court.
On July 22, 2020, in the Triangulum Lawsuit, the Company and its Directors filed a special motion to dismiss most of Triangulum and Saucier’s counterclaims under Nevada anti-SLAPP statute (Strategic Lawsuit Against Public Participation) because Triangulum and Saucier seek to impose liability on the Company and its Directors based upon their privileged communications with regulators. The Nevada district court denied the motion, and the Company and its Directors appealed the order to the Nevada Supreme Court. Discovery in the Triangulum Lawsuit is stayed pending the outcome of this appeal.
28
reasonably estimated. Our assessmentThe appeals to the Nevada Supreme Court by both Saucier and the Company in the Triangulum Lawsuit and the Advancement Lawsuit were referred to the Nevada Supreme Court’s mandatory Settlement Program. A consolidated settlement conference occurred on November 16, 2020, with no resolution of eachany of the issues on appeal or the lawsuit. The Nevada Supreme Court subsequently issued briefing schedules on the three appeals.
On November 24, 2020, Triangulum filed a Motion for Partial Summary Judgment in the Triangulum Lawsuit in the Nevada district court, seeking a ruling that the Company violated Nevada law and its Articles by issuing a promissory note as consideration for the redeemed shares and that the redemption was ineffective as a matter may change basedof law (the “Triangulum MPSJ”). The Company opposed Triangulum’s MPSJ and filed its own Countermotion for Summary Judgment (the “CMSJ”), seeking a ruling that as a matter of law the business judgement rule applies and prohibits any judicial review of the Board’s decisions related to the redemption. During the January 20, 2021 hearing on future unexpected events. both motions, the Nevada district court denied Triangulum’s MPSJ, finding that Nevada statutes allow for the payment of redemption consideration in the form of a promissory note and that the Company’s decisions to redeem and to issue a promissory note as consideration for the redemption are subject to the business judgment rule. The court further found again that the redeemed shares have been actually cancelled and cannot be placed in a constructive trust. The formal Order has not been filed by the Judge as of February 18, 2021. The Company expects Triangulum to appeal this ruling. The court also denied the Company’s CMSJ, without prejudice for the Company to refile after further discovery.
On December 18, 2020 Saucier filed a separate lawsuit in Nevada district court (which was served on January 21, 2021), alleging breach of contract related to his demand for indemnity from the Company (the “Indemnity Lawsuit”). Similar to the Company’s position in the Advancement Lawsuit discussed above, the Company denies that he is entitled to indemnity and moved to dismiss the action on February 16, 2021. The Company filed a Motion to Reassign the case to the Judge presiding over the Triangulum Lawsuit and the Advancement Lawsuit. On February 18, 2021, the Company’s Motion to Reassign was granted. A hearing on the Company’s Motion to Dismiss the Indemnity Lawsuit is currently set for March 23, 2021.
As mentioned above, discovery in the Triangulum Lawsuit has been stayed as a result of the Company’s appeal of the Anti-SLAPP motion decision to the Nevada Supreme Court. As such, the previously set April 2021 trial date cannot proceed until the discovery stay is lifted and after additional discovery proceeds.
In September 2018, we were served with a complaint by TableMax Corporation (“TMAX”) regarding the TMAX Agreement. We filed an answer denying the allegations and filed a partial motion for summary judgment seeking dismissal of the plaintiff’s claims. The suit was dismissed, subject to the right of the plaintiff to file an amended complaint on or before March 20, 2019. The plaintiff did not file an amended complaint within the time period set by the Judge. After that time, the Company considered the matter closed. TMAX filed a Motion for Leave to Amend their Complaint, which was granted by the Judge on May 11, 2020. On May 26, 2020 TMAX filed an Amended Complaint against the Company and other Co-Defendants. The Company will respond to the Amended Complaint denying the allegations as necessary, in a timely fashion.
An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position. Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity but may be material to the results of operations in any given period. We assumeperiod and accordingly, no obligation to updateprovision for loss has been reflected in the status of pending litigation, except as may be required by U.S. GAAP, applicable law, statue or regulation.
Uncertain tax positions. As further discussed in Note 13, in accordance with ASC 740, we have recorded a liability of $44,488accompanying financial statements related to potentially uncertain tax position as of December 31, 2017. However, due to the inherent uncertainty of the underlying tax positions, it is not possible to forecast the payment of this liability to any particular year.these matters.
33
NOTE 12. STOCKHOLDERS’ EQUITY
In February 2017, a former employee forfeited 100,000 shares of unvested restricted stock and paid us $35,000 in connection with the exercise of 150,000 fully-vested stock options.
On August 31, 2017, in accordance with the Lipparelli Agreement, the Board authorized the issuance of 800,000 restricted shares of our common stock, which shares vest as follows: (i) as to the first 200,000 shares, on August 31, 2017, (ii) as to the next 200,000 shares, on January 2, 2018, and (iii) as to the next 400,000 shares, on January 2, 2019. As of December 31, 2017, nonvested shares associated with the August 31, 2017 stock grant to Mr. Lipparelli were considered not issued until future services are rendered and shares become vested. The fair value of shares vested on August 31, 2017 was estimated to be $164,000, using the grant date trading price of our stock.
NOTE 13. INCOME TAXES
The components of the provision consist of the following for the years ended December 31, 20172020 and 2016:2019:
|
| 2020 |
|
| 2019 |
| ||||||||||
U.S. income (loss) income |
| $ | (3,477,895 | ) |
| $ | 2,953,394 |
| ||||||||
Non-U.S. income |
|
| 663,071 |
|
|
| — |
| ||||||||
(Loss) income before income taxes |
| $ | (2,814,824 | ) |
| $ | 2,953,394 |
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | 420,967 |
|
| $ | 680,882 |
|
| $ | (1,204,556 | ) |
| $ | 55,269 |
|
State |
|
| 7,197 |
|
|
| 20,561 |
|
|
| 1,745 |
|
|
| 19,550 |
|
Total current |
|
| 428,164 |
|
|
| 701,443 |
|
|
| (1,202,811 | ) |
|
| 74,819 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
| 145,602 |
|
|
| 71,657 |
|
|
| 674,138 |
|
|
| (67,299 | ) |
State |
|
| (9,193 | ) |
|
| (2,377 | ) |
|
| (77,264 | ) |
|
| 2,498 |
|
Total deferred |
|
| 136,409 |
|
|
| 69,280 |
|
|
| 596,874 |
|
|
| (64,801 | ) |
Provision for income taxes |
| $ | 564,573 |
|
| $ | 770,723 |
|
| $ | (605,937 | ) |
| $ | 10,018 |
|
The income tax provision differs from that computed at the federal statutory corporate income tax rate as follows for the years ended December 31, 20172020 and 2016:2019:
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Tax provision computed at the federal statutory rate |
| $ | 188,072 |
|
| $ | 862,215 |
|
| $ | (591,113 | ) |
| $ | 620,210 |
|
Foreign rate differential |
|
| (139,246 | ) |
|
| — |
| ||||||||
State income tax, net of federal benefit |
|
| (523 | ) |
|
| 21,860 |
|
|
| (55,558 | ) |
|
| 18,823 |
|
Permanent items |
|
| 163,388 |
|
|
| 78,804 |
|
|
| 52,818 |
|
|
| (287,480 | ) |
Credits |
|
| (52,285 | ) |
|
| (58,159 | ) |
|
| (24,801 | ) |
|
| (168,299 | ) |
Impact of CARES Act |
|
| (466,642 | ) |
|
| — |
| ||||||||
True ups and rounding |
|
| 145,121 |
|
|
| (115,397 | ) |
|
| 10,153 |
|
|
| (149,935 | ) |
Change in federal statutory rate, net of benefit |
|
| 132,377 |
|
|
| — |
|
|
| 1,364 |
|
|
| 5,823 |
|
Uncertain tax positions |
|
| (11,577 | ) |
|
| (18,600 | ) |
|
| 46,699 |
|
|
| (29,124 | ) |
Income tax provision |
| $ | 564,573 |
|
| $ | 770,723 |
| ||||||||
Valuation allowance |
|
| 560,389 |
|
|
| — |
| ||||||||
Provision for income taxes |
| $ | (605,937 | ) |
| $ | 10,018 |
|
2934
The tax effects of significant temporary differences representing net deferred tax assets and liabilities consisted of the following at December 31, 20172020 and 2016:2019:
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Deferred Tax Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use asset |
| $ | 320,787 |
|
| $ | 65,458 |
| ||||||||
Share based compensation |
|
| 313,910 |
|
|
| 349,018 |
| ||||||||
Intangible assets |
| $ | 135,068 |
|
| $ | 178,057 |
|
|
| 182,511 |
|
|
| 158,426 |
|
Accruals & reserves |
|
| 22,678 |
|
|
| 58,656 |
| ||||||||
Credits from amended return |
|
| — |
|
|
| 192,461 |
| ||||||||
Accruals and reserves |
|
| 67,259 |
|
|
| 68,501 |
| ||||||||
Other |
|
| 177,681 |
|
|
| 122,744 |
|
|
| 86,231 |
|
|
| — |
|
Total deferred tax assets |
|
| 335,427 |
|
|
| 551,918 |
|
|
| 970,698 |
|
|
| 641,403 |
|
|
|
|
|
|
|
|
|
| ||||||||
hh |
|
|
|
|
|
|
|
| ||||||||
Total valuation allowance |
|
| (560,389 | ) |
|
| — |
| ||||||||
hh |
|
|
|
|
|
|
|
| ||||||||
Deferred Tax Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use liability |
|
| (316,481 | ) |
|
| (65,555 | ) | ||||||||
Prepaid assets |
|
| (207,005 | ) |
|
| (99,636 | ) | ||||||||
Basis difference in fixed assets |
|
| (104,779 | ) |
|
| (184,861 | ) |
|
| (37,715 | ) |
|
| (76,929 | ) |
Other |
|
| (46,699 | ) |
|
| — |
| ||||||||
Total deferred tax liabilities |
|
| (104,779 | ) |
|
| (184,861 | ) |
|
| (607,900 | ) |
|
| (242,120 | ) |
|
|
|
|
|
|
|
|
| ||||||||
Gross deferred tax asset |
|
| 230,648 |
|
|
| 367,057 |
| ||||||||
Net deferred tax assets |
| $ | 230,648 |
|
| $ | 367,057 |
| ||||||||
Net deferred tax (liabilities)/assets |
| $ | (197,591 | ) |
| $ | 399,283 |
|
On August 21, 2020, the Company completed the acquisition of 100% of the member interests in PGP. As of December 31, 2020, the Company has evaluated its deferred tax attributes related to the acquisition of within the foreign jurisdiction of Isle of Man and recorded a tax-effected deferred tax asset of $0 as of December 31, 2020. The Company has assessed the foreign subsidiary income and taken the position that the income is subject to the provisions of Subpart F. Additional analysis is needed to determine if all or some part of this foreign income is eligible to be categorized as global intangible low-taxed income.
Pursuant to the CARES Act, the Company carried back net operating losses incurred in 2020 in the amount of approximately $3.5 million to tax years ended December 31, 2015 through December 31, 2019. The net operating loss carryback resulted in prior years' foreign tax credits and general business credits being released to subsequent years within the carryback period, with no credits carried forward as of December 31, 2020.
In addition, as of December 31, 2020, the Company recognized state net operating loss carryforwards of $1.1 million. The majority of the state carryforward amounts will expire in 2040, while some state net operating losses have an indefinite carryforward period.
In accordance with ASC Topic 740, we analyzed ourUS GAAP, the need to establish a valuation allowance at December 31, 2017 and determined that, based upon available evidence, it is more likely than not that certain of ouragainst deferred tax assets willis assessed periodically based on a more-likely-than-not realization threshold. Appropriate consideration is given to all positive and negative evidence related to that realization. This assessment considers, among other matters, the nature, frequency and severity of recent losses; forecasts of future profitability; the duration of statutory carryforward periods; experience with tax attributes expiring unused; and tax planning alternatives. The weight given to these considerations depends upon the degree to which they can be realized and, as such,objectively verified.
Upon assessing all of the relevant evidence, the Company determined it has removed anynot met the more-likely-than-not threshold to support the realization of all or part of its deferred tax assets. The Company has recorded a valuation allowance against certain deferredof its deferreds in the amount of $560,389. The current-year change resulted in additional tax assets. expense of $560,389, which impacted the Company’s effective tax rate by (16.11%).
The aggregate changes in the balance of gross unrecognized tax benefits (included as part of accrued expensesdeferred tax liabilities, net in the accompanying financial statements), which excludes interest and penalties, are as follows as of and for the years ended December 31, 20172020 and 2016:2019:
|
| 2017 |
|
| 2016 |
| ||
Beginning balance: |
| $ | 56,886 |
|
| $ | 51,074 |
|
Increases related to tax positions taken during the current year |
|
| 5,229 |
|
|
| 12,572 |
|
Decreases related to expiration of statute of limitations |
|
| (16,806 | ) |
|
| (6,760 | ) |
Other adjustments |
|
| (821 | ) |
|
| — |
|
Ending Balance: |
| $ | 44,488 |
|
| $ | 56,886 |
|
|
| 2020 |
|
| 2019 |
| ||
Beginning balance |
| $ | — |
|
| $ | 29,124 |
|
Increases related to tax positions taken during the prior year |
|
| 45,207 |
|
|
| — |
|
Increases related to tax positions taken during the current year |
|
| 1,492 |
|
|
| 4,565 |
|
Other adjustments |
|
| — |
|
|
| (33,689 | ) |
Ending balance |
| $ | 46,699 |
|
| $ | — |
|
35
Our total liability for unrecognized gross tax benefits was $44,488$46,699 as of December 31, 2017,2020, which, if ultimately recognized, would impact the annual estimated effective tax rate in future periods. We are subject to examination by the Internal Revenue Service for fiscal years 20142017 and thereafter. For states within the U.S. in which we conduct significant business, we generally remain subject to examination for fiscal years 20142017 and thereafter, unless extended for longer periods under state laws. We have no accrual for interest or penalties related to uncertain tax positions at December 31, 20172020 and 2016,2019, and did not recognize interest or penalties in the statements of operations during the years ended December 31, 20172020 and 2016.
As of December 31, 2017, we expected to use our foreign tax credits of $51,679 to offset federal income tax owed in 2017.
2019, as such amounts would be immaterial, if any.
NOTE 14. STOCK OPTIONS AND WARRANTS13. SHARE-BASED COMPENSATION
Stock options.Options
On May 10, 2018, the Board ratified and confirmed the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan is a broad-based plan under which shares of our common stock are authorized for issuance for awards, including stock options, stock appreciation rights, restricted stock, and cash incentive awards to Formembers of our Board, executive officers, employees and independent contractors. As of December 31, 2020, a total of 6,550,750 shares of our common stock were authorized for issuance. As of December 31, 2020, 171,701 shares remained available for issuance as new awards under the 2014 Plan.
During the years ended December 31, 20172020 and 2016,2019, we issued 465,000 and 520,000 options to purchase 1,465,000 and 540,000 shares of our common stock, respectively to members of our Board,executive officers, employees and independent contractors. The stock options generally have a contractual term of five years. The stock options issued to employees generally require continuous employment through vesting dates, while those issued to members of our Board generally vest immediately on the grant date.
On May 1, 2017, in connection with the Hagerty Employment Agreement, Mr. Hagerty was granted options to purchase 400,000 shares of our Common Stock at an exercise price per share of $0.60, which vest as follows: (i) as to the first 100,000 shares of stock, on May 1, 2017; (ii) as to the next 100,000 shares of stock, on May 1, 2018; (iii) as to the next 100,000 shares of stock, on May 1, 2019; and (iii) as to the next 100,000 shares of stock, on May 1, 2020, all pursuant to the terms of a stock option grant agreement by and between us and Mr. Hagerty.
On July 26, 2017, in connection with the Cravens Employment Agreement, Mr. Cravens was granted options to purchase up to 450,000 shares of our common stock, which vest as follows: (i) as to the first 150,000 shares of stock, on July 26, 2017, (ii) as to the next 150,000 shares of stock, on August 1, 2018, and (iii) as to the next 150,000 shares of stock, on August 1, 2019, all pursuant to the terms of a stock option grant agreement by and between us and Mr. Cravens. Provided that Mr. Cravens is a full-time employee on August 1, 2020, we agreed to grant to Mr. Cravens an option to purchase an additional 150,000 shares of our common stock with a
30
strike price equal to the price per share of our common stock as reported on OTC Markets on August 1, 2020 (or the nearest trading date thereafter), which option will vest on August 1, 2020 (or the nearest trading date thereafter).
The fair value of all stock options granted in 2017for the year ended December 31, 2020 and 20162019 was $710,368determined to be $435,639 and $141,311,$958,850, respectively, using the Black-Scholes option pricing model with the following assumptions:
|
| Options issued 2017 |
| Options issued 2016 |
| Options Issued 2020 |
|
| Options Issued 2019 |
| ||
Dividend yield |
| 0% |
| 0% |
| 0% |
|
| 0% |
| ||
Expected volatility |
| 78% - 87% |
| 87% - 91% |
| 70.98% - 76.97% |
|
| 70.88% - 72.11% |
| ||
Risk free interest rate |
| 1.73% - 2.20% |
| 1.01% - 1.93% |
| 0.27% - 1.39% |
|
| 1.37% - 2.51% |
| ||
Expected life (years) |
| 5.00 |
| 5.00 |
|
| 5.00 |
|
|
| 5.00 |
|
A summary of stock option activity is as follows:
|
| Common stock options |
|
| Weighted- average exercise price |
|
| Aggregate intrinsic value |
|
| Weighted-average remaining contractual term (years) |
| ||||
Outstanding – December 31, 2016 |
|
| 1,496,250 |
|
| $ | 0.32 |
|
| $ | 385,017 |
|
|
| 3.57 |
|
Issued |
|
| 1,465,000 |
|
|
| 0.73 |
|
|
| — |
|
|
| — |
|
Exercised |
|
| (150,000 | ) |
|
| 0.23 |
|
|
| — |
|
|
| — |
|
Expired |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Outstanding – December 31, 2017 |
|
| 2,811,250 |
|
| $ | 0.54 |
|
| $ | 1,849,517 |
|
|
| 3.65 |
|
Exercisable – December 31, 2017 |
|
| 1,985,693 |
|
| $ | 0.50 |
|
| $ | 1,382,138 |
|
|
| 3.40 |
|
|
| Common Stock Options |
|
| Weighted- Average Exercise Price |
|
| Aggregate Intrinsic Value |
|
| Weighted- Average Remaining Contractual Term (Years) |
| ||||
Outstanding – December 31, 2019 |
|
| 3,175,000 |
|
| $ | 0.92 |
|
| $ | 2,692,025 |
|
|
| 2.79 |
|
Issued |
|
| 465,000 |
|
| $ | 1.57 |
|
|
| — |
|
|
| — |
|
Exercised |
|
| (558,000 | ) |
| $ | 0.50 |
|
| $ | (487,976 | ) |
|
| — |
|
Forfeited |
|
| (100,000 | ) |
| $ | 1.57 |
|
|
| — |
|
|
| — |
|
Outstanding – December 31, 2020 |
|
| 2,982,000 |
|
| $ | 1.08 |
|
| $ | 2,101,780 |
|
|
| 2.35 |
|
Exercisable – December 31, 2020 |
|
| 2,137,000 |
|
| $ | 0.89 |
|
| $ | 1,904,172 |
|
|
| 1.77 |
|
A summary of unvested stock option activity is as follows:
|
| Common stock options |
|
| Weighted-average exercise price |
|
| Aggregate intrinsic value |
|
| Weighted-average remaining contractual term (years) |
| ||||
Unvested – December 31, 2016 |
|
| 128,889 |
|
| $ | 0.34 |
|
| $ | 30,933 |
|
|
| 3.99 |
|
Granted |
|
| 1,465,000 |
|
|
| 0.73 |
|
|
| — |
|
|
| — |
|
Vested |
|
| (768,332 | ) |
|
| 0.78 |
|
|
| — |
|
|
| — |
|
Forfeited or expired |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Unvested – December 31, 2017 |
|
| 825,557 |
|
| $ | 0.63 |
|
| $ | 467,379 |
|
|
| 4.27 |
|
| Common Stock Options |
|
| Weighted- Average Exercise Price |
|
| Aggregate Intrinsic Value |
|
| Weighted- Average Remaining Contractual Term (Years) |
| |||||
Unvested – December 31, 2019 |
|
| 1,053,333 |
|
| $ | 1.43 |
|
| $ | 357,734 |
|
|
| 3.92 |
|
Granted |
|
| 465,000 |
|
| $ | 1.57 |
|
|
| — |
|
|
| — |
|
Vested |
|
| (573,333 | ) |
| $ | 1.34 |
|
|
| — |
|
|
| — |
|
Forfeited |
|
| (100,000 | ) |
| $ | 1.57 |
|
|
| — |
|
|
| — |
|
Unvested – December 31, 2020 |
|
| 845,000 |
|
| $ | 1.55 |
|
| $ | 197,608 |
|
|
| 3.83 |
|
As of December 31, 2017,2020, our unrecognized share-based compensation expense associated with the stock options issued was $262,940,$611,000, which willis expected to be amortized over a weighted-average of 1.902.04 years.
The cost of all stock options and stock grants (Note 14) issued have been classified as share-based compensation on the statement of operations for the years ended December 31, 2017 and 2016. Total share-based compensation was $813,480 and $145,732 for the years ended December 31, 2017 and 2016, respectively.
36
Restricted Awards
Warrants.During the year ended On August 29, 2016, in connection with the Term Loan agreement,December 31, 2020, we issued the Warrants to purchase 1,965,780 shares an aggregate of common stock at an initial exercise price of $0.30 per share to the Term Loan lenders. The number of shares of common stock issuable upon exercise of the Warrants, and/or the exercise price of such shares, is subject to standard anti-dilution adjustments in the event of stock splits, reorganizations, stock dividends, and similar events. As of the date of the Warrant Agreement, the shares of common stock issuable upon a full exercise of the Warrants represented 5.0% of the total issued and outstanding228,333 restricted shares of our common stock. The lendersstock valued at $279,586 to our board members in consideration of their service on the Board. These shares vested immediately on the grant date. An additional 130,000 restricted shares of our common stock valued at $175,045 were also granted the right, but not the obligation,issued to purchase up to 5.0%an employee and contractor of the total numberCompany. These shares were granted in consideration of new securities that we may, from time to time, sell and issue.
The Warrants expire on August 29, 2022, and may not be exercised priorthe individuals’ service to the earliest of (a) the fifth anniversary of the Term Loan Agreement, (b) the dateCompany. These shares vest in one year on which the obligations described in the Term Loan Agreement are satisfied in full, or (c) the date on which the lenders declare all or any portion of the outstanding amount of the Term Loan to be due and payable under the terms of the Term Loan Agreement (collectively, the "Trigger Date"). Exercise of the Warrants requires a sixty (60) day prior written notice, during which time we may exercise its Call Right described below.
The Warrant Agreement includes a call right (the "Call Right") whereby we can purchase the Warrants for a fixed sum of $1,333,333 upon providing the Warrant holders with a thirty (30) day prior written notice. Furthermore, the Warrant Agreement also includes a put right (the "Put Right") whereby the lenders may require us to purchase from the lenders all or any portion of the Warrants at a purchase price equal to the lesser of (a) the fair market value of the underlying shares of common stock as of the date of exercise of the Put Right, or (b) $1,333,333. The Put Right may not be exercised prior to the Trigger Date (as defined above), and the Put Right
31
expires on August 29, 2022. The foregoing summary of the Term Loan Agreement and the Warrant Agreement is qualified in its entirety by reference to the respective agreements, which are found as Exhibits 99.1 and 99.2, respectively, to our Form 8-K filed with the SEC on August 29, 2016.November 12, 2021.
As of December 31, 2017, the Warrants were the only financial instrument measured at estimated fair value on a recurring basis, which was determined using the Black-Scholes pricing model, subject to a ceiling on the maximum amount we will have to pay to repurchase the warrants under certain circumstances. The estimated fair value of the Warrants was determined using Level 2 inputs, as defined ASC 820, since inputs utilized in the Black-Scholes pricing model were based on observable market inputs, but not for identical assets or liabilities.
NOTE 15.14. SUBSEQUENT EVENTS
On February 21, 2018, Triangulum, an entity controlled by Mr. Saucier, sold 395,000 sharesWe evaluate subsequent events through the date of our common stockissuance of the financial statements. There have been no subsequent events that occurred during such period that would require adjustment to or disclosure in the open market (OTCQB exchange) at $1.09 per share.financial statements as of and for the quarter ended December 31, 2020 except as follows:
On March 29, 2021, the Company entered into an amended and restated credit agreement with Zions Bancorporation, N.A. dba Nevada State Bank (“the A&R Credit Agreement”). The shares were sold pursuant to Rule 144A&R Credit Agreement replaced the original credit agreement entered into by the Company with Zions Bancorporation, N.A. dba Nevada State Bank on April 24, 2018 and last modified on November 16, 2020. The A&R Credit Agreement provides for a Term Loan in the amount of $7,022,300 and a Revolving Loan in the amount of $1,000,000. If not paid earlier, amounts outstanding under the Revolving Loan mature on April 24, 2022, and amounts outstanding under the Term Loan mature on April 24, 2023. On March 12, 2020, the Company drew down $1,000,000 on the Revolving Loan component of the Securities Act.original credit agreement.
Under the A&R Credit Agreement, outstanding balances accrue interest based on one-month U.S. dollar London interbank offered rate (“LIBOR”) plus an applicable margin of 3.50% or 4.00%, depending on our Total Leverage Ratio (as defined in the A&R Credit Agreement). Effective December 31, 2021, LIBOR will no longer serve as a reference rate for bank loans, among other investment classes. The A&R Credit Amendment stipulates that a substitute index rate will be selected and used in lieu of LIBOR.
The A&R Credit Agreement contains affirmative and negative financial covenants (as defined in the A&R Credit Agreement) and other restrictions customary for borrowings of this nature. In particular, we are required to maintain (i) a quarterly minimum Fixed Charge Coverage ratio of 1.25x; (ii) a quarterly maximum Total Leverage ratio of 22.50x for the quarter ending March 31, 2021, 10.00x for quarter ending June 30, 2021, 6.50x for the quarter ending September 30, 2021 with semi-annual step-downs of 0.25x commencing December 31, 2021 and quarterly thereafter; (iii) a quarterly maximum Senior Leverage ratio of 5.25x for the quarter ending March 31, 2021, 2.50x for the quarter ending June 30, 2021 and 2.00x quarterly thereafter; (iv) a quarterly Minimum EBITDA covenant of $2.4 million for each of the quarters ending March 31, 2021, June 30, 2021 and September 30, 2021 and $8.0 million quarterly thereafter; (v) a quarterly Minimum Liquidity covenant requiring the Company to have cash and cash equivalents of no less than $1.5 million at quarter ends through and including June 30, 2021 and $2.5 million quarterly thereafter; and (vi) a yearly maximum Maintenance Capital Expenditure covenant of 5% of total revenues for the prior year. The Company was in compliance with its Maintenance Capital Expenditure and Minimum Liquidity covenants as of December 31, 2020. The Company was not in compliance with its Fixed Charge Coverage ratio, Total Leverage ratio, Senior Leverage ratio and Minimum EBITDA covenant as of December 31, 2020. The Amended and Restated Credit Agreement has waived these existing defaults as of December 31, 2020.
The obligations under the A&R Credit Agreement are secured by substantially all of the assets of the Company and its subsidiaries.
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ITEMITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed submitted under the Exchange Act is accumulated and communicated to management including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017,2020, our disclosure controls and procedures were effective.
No change in our internal control over financial reporting occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Annual Report on Internal Control Over Financial Reporting
Our internal control over financial reporting is a process designed by, or under the supervision of, our CEOChief Executive Officer and CFOChief Financial Officer and effected by our Board, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of our Board and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Under the supervision and with the participation of our management, including our CEO,Chief Executive Officer, we evaluated the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control - Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation under the criteria established in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.2020.
This annual report is not required and does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and executive officers.The following information sets forth the names of our current directors and executive officers and their ages.
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Set forth belowrequired by this Item is a brief description of the background and business experience of each of our current executive officers and directors.
Todd Cravens was appointed as our President and Chief Executive Officer on July 24, 2017. Mr. Cravens previously served as our Vice President of Business Development, a position he had held between January 2017 and July 2017. Prior to joining Galaxy Gaming, Mr. Cravens served as the Chief Executive Officer of Americas for TCS/John Huxley (a leader in table games products for casinos around the world) from 2013 to 2016; as President of AGS Illinois LLP and Vice President and General Manager of the Illinois Operations of AGS (a leading designer and supplier of electronic gaming machines and other products and services for the gaming industry) from 2010 to 2011; as Director of New Business of Betson Enterprises (a global full-line distributor of amusement and vending equipment) from 2002 to 2010; Vice President of Operations of uWink (a publicly traded digital entertainment company) from 1999 to 2001; and as the Vice President of Sales of Bulldog Amusements (specializing in sales and marketing functions for the coin operated amusement industry) from 1995 to 2000. In addition, Mr. Cravens has been the principal of Cravens Consulting, LLC (specializing in developing gaming markets) since 2011.
Harry C. Hagerty was appointed as our Chief Financial Officer, Secretary and Treasurer on May 1, 2017. Mr. Hagerty served as President and Chief Financial Officer of Sightline Payments LLC, a privately-held provider of payments solutionsincorporated by reference to the gaming industry, from November 2011 to August 2017. Mr. Hagerty served as a member of the Board of Directors of Trump Entertainment Resorts, Inc. from June 2008 to July 2010; as Chief Financial Officer of Global Cash Access Holdings, Inc., a publicly-traded provider of payments solutionsapplicable information in our Proxy Statement related to the gaming industry, from July 2004 to July 2007; and as Executive Vice President and Chief Financial Officer2021 Annual Meeting of Caesars Entertainment, Inc., an operator of casino resorts around the world, from March 2002 to May 2004. Prior to joining Caesars, Mr. Hagerty had a twenty-year career as an investment banker.
Mark A. Lipparelli Stockholders, which was appointed to our Board and as our Chairmanfiled on July 26, 2017. Mr. Lipparelli currently serves as the Chief Executive Officer of Gioco Ventures, a strategic advisory and product development firm serving the gaming, investment, technology and entertainment industries around the globe, a position he has held since 2007. Mr. Lipparelli also formerly represented State Senate District 6 in the Nevada Legislature, having been appointed to the post in December 2014, and served on various Senate committees. Mr. Lipparelli has also been an appointee to the Nevada Gaming Policy Committee. Between 2002 and 2007, Mr. Lipparelli served in various executive management positions at Bally Technologies, Inc., a gaming technology supply company listed on the NYSE, including as Executive Vice President of Operations. Prior to joining Bally, Mr. Lipparelli served as Executive Vice President and then President of Shuffle Master, Inc., a publicly traded gaming supply company, from 2001 to 2003; as Chief Financial Officer of Camco, Inc., a retail chain holding company, from 2000 to 2001; as Senior Vice President of Entertainment Systems for Bally Gaming, Inc. (a subsidiary of publicly traded Alliance Gaming Corporation), from 1998 to 2000; and various management positions including Vice President of Finance for publicly traded Casino Data Systems from 1993 to 1998. Between 2009 and 2012, Mr. Lipparelli served as a Board Member and Chairman of the Nevada State Gaming Control Board. Mr. Lipparelli is a Board Trustee Emeritus of the University of Nevada Foundation, Board Member of the National Center for Responsible Gaming, and member of the International Association of Gaming Advisors and of the International Masters of Gaming Law. Mr. Lipparelli received a bachelor’s degree in finance (1987) and a master’s degree in economics (1993) from the University of Nevada, Reno. Among other qualifications, Mr. Lipparelli brings over 20 years of experience in the gaming industry, including his service as Chief Executive Officer of a strategic advisory and product development firm, various executive management positions at companies serving the gaming industry, his legislative experience with the State Senate and past roles with the Nevada State Gaming Control Board.
Robert B. Saucier is a Director. Mr. Saucier is our founder and served as CEO and Chairman since inception through July 2017 and for our accounting and operational predecessors since 1997. During his career, Mr. Saucier has founded and grown five start-up companies. He was founder and CEO of the Mars Hotel Corporation, (1992 - 1998), a company that developed and managed the first non-tribal casino in Washington. Previously, Mr. Saucier founded International Pacific, an Inc. 500 company which recorded a
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2,447% growth rate (five-year period) and served as its President and Chairman (1986 - 1992). He also founded and led Titan International, Inc. (1981 - 1986), a company that was engaged in electronic safety, security and surveillance systems. Throughout his career, Mr. Saucier has consulted with and invested in numerous business ventures and real estate development projects. Among other qualifications, Mr. Saucier brings to the Board executive leadership experience, including his service as CEO of a casino, along with extensive domestic and international business experience.
Norm DesRosiers is a Director. A veteran of the U.S. Army, Mr. DesRosiers earned a Bachelor’s Degree in Law and Justice from Central Washington State University in 1975. For the period of 1970 to 1979, Mr. DesRosiers served as a Law Enforcement Sergeant with the Lynnwood, WA Police Department. For the period of 1980 to 1992, Mr. DesRosiers held several positions with Boeing Commercial Aircraft Company. During that period, he also spent several years operating his own private investigation firm. In 1993, Mr. DesRosiers joined the Fort McDowell Gaming Commission in Arizona, enforcing gaming regulatory compliance. In 1994, he joined the San Carlos Apache Tribal Gaming Commission in Arizona as Executive Director, during which time his organization was recognized as a model regulatory agency. In 1998, Mr. DesRosiers became a Commissioner with Viejas Gaming Commission in California, where he wrote ordinances and gaming commission regulations. In 2007, he was appointed by the U.S. Secretary of the Interior to serve as one of a three member commission for the National Indian Gaming Commission (NIGC) located in Washington D.C.. Most recently in 2010, Mr. DesRosiers joined the San Manuel Tribal Gaming Commission in California as Executive Director, and was appointed as Commissioner seven months later. His credentials include serving on the Federal Advisory Committee to the National Indian Gaming Commission for the Development of Environmental, Health and Safety Regulations for Tribal Gaming facilities (2001). He also has written the first technical standards for gaming devices to be adopted in the State of California and has published numerous articles on tribal gaming regulatory subjects. Among other qualifications, Mr. DesRosiers brings to the Board extensive gaming industry experience from industry regulatory organizations.
William A. Zender is a Director. A graduate of the University of Nevada at Las Vegas, Mr. Zender earned a Bachelor’s Degree in Hotel Administration in 1976 and a Master’s Degree in Business from the University of Phoenix in 2004. For the period of 1979 to 1981, Mr. Zender became an Enforcement Agent with the Nevada Gaming Control Board. In 1982, Mr. Zender performed various consulting services and continued such consulting through various times during his career. In 1988, Mr. Zender became the Asian Games Manager at the famous Desert Inn Casino in Las Vegas until 1989 when he became the Casino Manager for the Maxim Hotel and Casino, also in Las Vegas. In 1991, Mr. Zender was the Games Manager at Artichoke Joe’s Casino in San Bruno, California. Mr. Zender was the Vice President and Owner of the Aladdin Hotel and Casino from 1992 to 1997. In 2005, Mr. Zender became Consultant and Owner of Last Result Consulting until 2007 at which time he began performing consulting services full time through Bill Zender and Associates, LLC. His credentials include authoring seven books on gambling and gaming management and is currently a monthly contributor to Casino Enterprise Management Magazine. Mr. Zender was awarded the “Lifetime Achievement Award” at the 2014 World Game Protection Conference for his invaluable contributions and generous dedication to the casino industry. Mr. Zender brings to the Board extensive table game industry experience.
Bryan W. Waters is a Director. A graduate of University of California, Los Angeles, Mr. Waters started his career with Wells Fargo Bank in 1988 where he held numerous positions, including President of the Southern Nevada region. In 2001, Mr. Waters became Chief Financial Officer of Camco, Inc., a specialty finance lender with both brick-and-mortar and internet retailing operations.. Shortly after his appointment, Mr. Waters also absorbed the roles of President and Chief Operating Officer until the successful sale of the company to Cash America International, Inc. a NYSE listed company. Mr. Waters joined Pacific National Bank in 2006 as President and Chief Executive Officer, and was responsible for a privately held $2.3 billion 17 branch bank until its sale to U.S. Bank in October 2009. In 2010, Mr. Waters became Chief Executive Officer of B-Line, LLC, the largest purchaser and servicer of unsecured consumer bankruptcy debt in the country. At the time of its successful sale in late 2011, B-Line owned and serviced in excess of $300 million in assets. In 2012, Mr. Waters founded Magnolia Lane Partners, LLC, which is comprised of former executives of B-Line (an advisory and asset management firm focused primarily in the accounts receivable management industry with a specific focus on purchasing consumer receivables in bankruptcy). Also in 2012, Mr. Waters joined the Board of CBV Collection Services, LTD (“CBV”), a private equity and management owned company and one of the largest independent outsourcing, collection services and debt buying organizations in Canada. In September of 2013, Mr. Waters assumed the role of Chief Executive Officer of CBV and served in that role until its successful sale in June 2015. Mr. Waters served as CEO of North America for Dollar Financial Group leading over 3000 employees through over 850 finance centers from June 2015 through June 2016. Most recently, Mr. Waters served as President and Chief Operating Officer of Genesis Financial Solutions, the largest second look private label credit card issuer in the United States. Mr. Waters is a tenured senior executive and brings to the Board significant experience in finance, commercial banking, capital raising, financial turnaround, strategic and tactical planning and new company start-ups.
Our bylaws authorize no fewer than one and no more than thirteen directors. We currently have five directors.
Term of office. Our directors are generally appointed for a one-year term. Our officers are appointed by our Board and hold office until removed by the Board.
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Family relationships. There are no family relationships between or among the directors, executive officers or persons nominated or chosen by us to become directors or executive officers.
Director or officer involvement in certain legal proceedings. To the best of our knowledge, during the past ten years, none of the following occurred with respect to any of our present or former directors or executive officers: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of any competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Committees of the Board. We do not currently have an executive committee or stock plan committee of our Board of Directors.
Compensation Committee. At a meeting of the Board of Directors on July 8, 2014, the Board approved the creation of a Compensation Committee, and on October 13, 2014, adopted the Compensation Committee Charter (the “Charter”).
Pursuant to the Charter, the Compensation Committee is to be comprised of no fewer than two non-employee members of the Board, and the members shall be free from any relationships or conflicts of interest with respect to the Company that would impair the member’s ability to make independent judgments. The members of the Compensation Committee will be appointed by the Board and can be removed by the Board at any time, with or without cause.
The authority and duties of the Compensation Committee include but are not limited to: approving the corporate goals and objectives relating to compensation and bonus incentive structure of the CEO and other executive officers and key employees and any company-wide bonus plans; approving any material grants of equity compensation of more than 100,000 shares of our common stock; retaining and terminating any compensation consultant; and reviewing and assessing the adequacy of the Charter.
As of the date of this report, the members of the Compensation Committee were Mr. Zender (Chairman), Mr. DesRosiers and Mr. Waters.
Corporate Governance Committee. At a meeting of the Board of Directors on July 8, 2014, the Board approved the creation of a Corporate Governance Committee. As of the date of this report, the Board had not finalized the Corporate Governance Committee Charter.
As of the date of this report, the members of the Corporate Governance Committee were Mr. DesRosiers (Chairman), Mr. Zender and Mr. Waters.
Audit Committee. We do not have a separately-designated standing audit committee. The entire Board performs the functions of an audit committee, but no written charter governs the actions of the Board when performing the functions that would generally be performed by an audit committee. The Board approves the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related to financial reporting. In addition, the Board reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance of the independent auditor.
Our board of directors has determined that as of the date of this report, we have an audit committee financial expert, Mr. Waters, serving on the board of directors. We have determined that Mr. Waters qualifies as an independent board member.
Nominating Committee. Our Board does not maintain a nominating committee. As a result, no written charter governs the director nomination process. The size of our Board, at this time, does not require a separate nominating committee. There were no changes during the year ended December 31, 2017, or as of the date of this report, to the process for recommending nominees to our board of directors.
When evaluating director nominees, our directors consider the following factors:
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Our goal is to assemble a Board that brings together a variety of perspectives and skills derived from high quality business and professional experience. In doing so, the Board will also consider candidates with appropriate non-business backgrounds. Other than the foregoing, there are no stated minimum criteria for director nominees, although the Board may also consider such other factors as it may deem are in our best interests as well as our stockholders. In addition, the Board identifies nominees by first evaluating the current members of the Board willing to continue in service. Current members of the Board with skills and experience that are relevant to our business and who are willing to continue in service are considered for re-nomination. If any member of the Board does not wish to continue in service or if the Board decides not to re-nominate a member for re-election, the Board then identifies the desired skills and experience of a new nominee in light of the criteria above. Current members of the Board are polled for suggestions as to individuals meeting the criteria described above. The Board may also engage in research to identify qualified individuals. To date, we have not engaged third parties to identify or evaluate or assist in identifying potential nominees, although we reserve the right in the future to retain a third-party search firm, if necessary. The Board does not typically consider shareholder nominees because it believes that our current nomination process is sufficient to identify directors who serve our best interests.
Code of Ethics. As of December 31, 2017, we had not adopted a Code of Ethics for Financial Executives, which would include our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
Section 16(a) beneficial ownership reporting compliance. Section 16(a) of the Exchange Act required our directors and executive officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities. Officers, directors and greater than ten percent beneficial shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To the best of our knowledge based solely on a review of Forms 3,January 4, and 5 (and any amendments thereof) received by us during or with respect to the year ended December 31, 2017, the following Form 4 reports were not timely filed: (1) Mr. Saucier, February 16, 2017, March 15, 2017, April 20, 2017; (2) Mr. Hagerty, May 8, 2017; (3) Mr. Cravens, August 9, 2017; (4) Mr. Lipparelli, September 8, 2017; (3) Mr. DesRosiers, Waters and Zender, July 6, 2017 and October 4, 1017.2021.
ITEM 11. EXECUTIVE COMPENSATION
Compensation discussion and analysis. Our current executive compensation system consists of cash, stock and/or stock options compensationThe information required by this Item is incorporated by reference to the executive officers, who are primarily responsible forapplicable information in our Proxy Statement related to the day-to-day management and continuing development2021 Annual Meeting of our business.Stockholders, which was filed on January 4, 2021.
Summary compensation table. The table below summarizes all compensation awarded to or earned by our current executive officers for each of the last two completed fiscal years.
SUMMARY COMPENSATION TABLE |
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Name and principal position |
| Year |
| Salary ($) |
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| Bonus ($) |
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| Stock awards ($) |
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| Option awards ($) |
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| Non-equity incentive plan ($) |
| Nonqualified deferred earnings ($) |
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| All other compensation ($) (1) |
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| Total ($) |
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Todd P. Cravens (2) Chief Executive Officer |
| 2017 |
| $ | 204,625 |
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| $ | 103,542 |
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| — |
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| $ | 265,390 |
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| — |
| — |
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| $ | 13,548 |
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| $ | 587,105 |
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Robert B. Saucier Former Chief Executive Officer |
| 2017 2016 |
| $229,548 $200,000 |
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| $112,500 $80,200 |
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| — — |
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| — — |
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| — — |
| — — |
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| $44,624 $37,062 |
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| $386,672 $317,262 |
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Harry C. Hagerty (3) Chief Financial Officer |
| 2017 |
| $ | 78,385 |
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| $ | 54,082 |
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| — |
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| $ | 160,185 |
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| — |
| — |
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| $ | 2,935 |
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| $ | 295,587 |
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Gary A, Vecchiarelli Former Chief Financial Officer |
| 2016 |
| $ | 180,000 |
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| — |
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| — |
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| $ | 4,232 |
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| — |
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| — |
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| $ | 18,000 |
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| $ | 202,232 |
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Outstanding equity awards at fiscal year-end table. The table below summarizes all unexercised options, stock that has not vested, and equity incentive plan awards for each named executive officer outstanding as of the end of our last completed fiscal year.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END |
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OPTION AWARDS |
| STOCK AWARDS |
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Name |
| Number of Securities Underlying Unexercised Options (#) Exercisable |
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| Number of Securities Underlying Unexercised Options (#) Unexercisable |
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| Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) |
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| Option Exercise Price ($) |
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| Option Expiration Date |
| Number of Shares or Units of Stock That Have Not Vested (#) |
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| Market Value of Shares or Units of Stock That Have Not Vested ($) |
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| Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) |
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| Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (#) |
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Todd P Cravens, CEO |
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| 150,000 |
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| 400,000 |
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| — |
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| $0.60 - $0.76 |
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| 8/1/2022 |
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| — |
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| — |
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| — |
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| — |
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Harry C. Hagerty, CFO |
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| 100,000 |
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| 300,000 |
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| — |
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| 0.60 |
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| 5/1/2022 |
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| — |
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Compensation of directors table. The table below summarizes all compensation paid to our directors for our last completed fiscal year.
DIRECTOR COMPENSATION |
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Name |
| Fees earned or paid in cash |
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| Stock awards |
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| Option awards |
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| Non-equity incentive plan compensation |
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| Non-qualified deferred compensation earnings |
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| All other compensation |
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| Total |
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Mark A. Lipparelli (1) |
| $ | 30,000 |
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| $ | 164,000 |
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| — |
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| — |
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| — |
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| — |
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| $ | 194,000 |
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Robert B. Saucier (2) |
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| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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Norm DesRosiers (3) |
| $ | 30,000 |
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| — |
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| $ | 61,723 |
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| — |
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| — |
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| — |
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| $ | 91,723 |
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William A. Zender (4) |
| $ | 30,000 |
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| — |
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| $ | 61,723 |
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| — |
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| — |
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| — |
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| $ | 91,723 |
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Bryan Waters (5) |
| $ | 30,000 |
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| — |
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| $ | 61,723 |
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| — |
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| — |
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| — |
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| $ | 91,723 |
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of April 2, 2018, the beneficial ownership of our common stockinformation required by each executive officer and director,this Item is incorporated by each person known by us to beneficially own more than 5% of our common stock and by the executive officers and directors as a group. Unless otherwise indicated, the named persons possess sole voting and investment power with respectreference to the shares listed (exceptapplicable information in our Proxy Statement related to the extent such authority is shared with spouses under applicable law). The percentages are based upon 39,765,591 shares outstanding as2021 Annual Meeting of April 2, 2018, except for certain parties who hold stock options and warrants that are presently exercisable or exercisable within 60 days, whose percentages are based upon the sum of shares outstanding as of April 2, 2018 plus the number of shares subject to stock options and warrants that are presently exercisable or exercisable within 60 days held by them, orStockholders, which may be converted into Common Stock as indicated in the following notes The shares owned by Triangulum that are under the VDCTA Agreements are excluded from the Triangulum line below and added to the corresponding lines for the recipients of the VDCTA Agreements See Note 2 to our audited financial statements included in Item 8. “Financial Statements and Supplementary Data” for more detail.was filed on January 4, 2021.
Name of beneficial owner |
| Amount of beneficial ownership |
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| Percent of class |
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Triangulum Partners, LLC (1) |
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| 17,320,862 |
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| 43.56 | % |
Mark Lipparelli, Director (2) |
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| 2,250,411 |
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| 5.66 | % |
Norm DesRosiers, Director(3) |
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| 1,752,494 |
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| 4.41 | % |
William A. Zender, Director(4) |
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| 1,719,161 |
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| 4.32 | % |
Bryan Waters, Director(5) |
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| 1,619,161 |
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| 4.07 | % |
Total of All Directors and Executive Officers (5 persons): |
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| 24,662,089 |
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| 62.02 | % |
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Except as set forth below, noneThe information required by this Item is incorporated by reference to the applicable information in our Proxy Statement related to the 2021 Annual Meeting of our directors or executive officers, nor any proposed nominee for election as a director, nor any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to all of our
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outstanding shares, nor any members of the immediate family (including spouse, parents, children, siblings, and in-laws) of any of the foregoing persons has any material interest, direct or indirect, in any transaction over the last two years or in any presently proposed transactionStockholders, which in either case, has or will materially affect us:was filed on January 4, 2021.
We are not a “listed issuer” within the meaning of Item 407 of Regulation S-K. Applying the definition of independence set forth in Rule 4200(a)(15) of The Nasdaq Stock Market, Inc., we have determined all of our directors are independent directors.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
BelowThe information required by this Item is incorporated by reference to the tableapplicable information in our Proxy Statement related to the 2021 Annual Meeting of Audit Fees billed by our auditor in connection with the audit of our annual financial statements for the years ended:Stockholders, which was filed on January 4, 2021.
Fee type |
| 2017 |
|
| 2016 |
| ||
| $ | 120,705 |
|
| $ | 78,534 |
| |
Audit-related fees |
|
| — |
|
|
| 5,415 |
|
Total fees |
| $ | 120,705 |
|
| $ | 83,949 |
|
As noted above, we do not have a separate audit committee, and our full board of directors performs the functions of an audit committee. The board of directors is responsible for approval of the independent public accounting firm. As noted above, there
were no non-audit related fees paid to our independent public accounting firm.
40
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
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The following financial statements and schedules listed below are included in this Form 10-K.
Financial Statements (See Item 8)
Exhibit Number |
| Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
10.1 |
| Employment agreement with Harry C. Hagerty, Chief Financial Officer, dated May 1, 2017. | 10-Q | 000-30653 | 10.1 | May 15, 2017 |
|
10.2 |
| Employment agreement with Todd P. Cravens, dated July 27, 2017. | 10-Q | 000-30653 | 10.1 | August 14, 2017 |
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10.3 |
| Board of director service agreement of Mark A. Lipparelli, dated August 31, 2017. | 8-K | 000-30653 | 99.1 | September 7, 2017 |
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10.4 |
| 8-K | 000-30653 | 99.1 | September 27, 2017 |
| |
10.5 |
| Amendment No. 1 to Employment Agreement with Harry C. Hagerty, dated January 11, 2018. |
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|
| X |
31.1 |
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| X | |
31.2 |
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| X | |
32.1 |
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| X | |
101 |
| Financials in XBRL format |
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|
| X |
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit Number |
| Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
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3.1 |
| 8-K | 000-30653 | 3.1 | February 13, 2009 |
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3.2 |
| 8-K | 000-30653 | 3.2 | February 13, 2009 |
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3.3 |
| 8-K | 000-30653 | 3.2 | February 14, 2020 |
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10.1 |
| Lease agreement with Abyss Group, LLC for 6980 O’Bannon Drive (related party) | 10-K | 000-30653 | 10.2 | April 1, 2013 |
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10.2 |
| Amendment to lease agreement with Abyss Group, LLC for 6980 O’Bannon Drive (related party) | 10-K | 000-30653 | 10.3 | April 1, 2013 |
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10.3 |
| Exclusive Operating and License Agreement with TableMAX Gaming, Inc. | 8-K | 000-30653 | 99.2 | February 24, 2011 |
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10.4 |
| 8-K | 000-30653 | 10.1 | October 11, 2011 |
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10.5 |
| Prime Table Games Promissory Note and Security Agreement - US | 8-K | 000-30653 | 10.2 | October 11, 2011 |
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10.6 |
| Prime Table Games Promissory Note and Security Agreement - UK | 8-K | 000-30653 | 10.3 | October 11, 2011 |
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10.7 |
| Employment agreement with Gary A. Vecchiarelli, Chief Financial Officer | 8-K | 000-30653 | 10.1 | July 9, 2012 |
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10.8 |
| Board of Directors Service Agreement with Norm DesRosiers, Director | 8-K | 000-30653 | 99.2 | February 3, 2014 |
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10.9 |
| Lease agreement with SRC Spencer, LLC for 6767 Spencer Drive | 8-K | 000-30653 | 10.1 | February 27, 2014 |
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10.10 |
| Board of Directors Service Agreement with William A. Zender, Director | 8-K | 000-30653 | 1.1 | April 2, 2014 |
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10.11 |
| Board of Directors Service Agreement with Bryan W. Waters, Director | 10-K | 000-30653 | 10.11 | March 31, 2015 |
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10.12 |
| Promissory Note with Robert Saucier, Chief Executive Officer | 8-K | 000-30653 | 10.1 | October 29, 2015 |
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10.13 |
| 2015 Employment Agreement with Gary A. Vecchiarelli, Chief Financial Officer | 10-Q | 000-30653 | 99.2 | November 16, 2015 |
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10.14 |
| Employment agreement with Harry C. Hagerty, Chief Financial Officer, dated May 1, 2017 | 10-Q | 000-30653 | 10.1 | May 15, 2017 |
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10.15 |
| 10-Q | 000-30653 | 10.1 | August 14, 2017 |
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10.16 |
| 10-Q | 000-30653 | 99.1 | May 16, 2016 |
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10.17 |
| 10-Q | 000-30653 | 99.2 | May 16, 2016 |
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10.18 |
| 10-Q | 000-30653 | 99.3 | May 16, 2016 |
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10.19 |
| 10-Q | 000-30653 | 99.4 | May 16, 2016 |
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10.20 |
| Settlement Agreement with Red Card Gaming, Inc. and AGS, LLC | 8-K | 000-30653 | 99.1 | July 13, 2016 |
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10.21 |
| 8-K/A | 000-30653 | 99.1 | August 30, 2016 |
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10.22 |
| 8-K/A | 000-30653 | 99.2 | August 30, 2016 |
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40
Exhibit Number |
| Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
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10.23 |
| 8-K/A | 000-30653 | 99.3 | August 30, 2016 |
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10.24 |
| 10-Q | 000-30653 | 99.1 | November 16, 2015 |
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10.25 |
| Gary Vecchiarelli Indemnification Agreement dated November 14, 2015 | 10-Q | 000-30653 | 99.3 | November 16, 2015 |
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10.26 |
| 10-K | 000-30653 | 10.5 | April 2, 2018 |
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10.27 |
| Board of Directors Service Agreement with Mark A. Lipparelli | 8-K | 000-30653 | 99.1 | September 7, 2017 |
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10.28 |
| Form of Voting and Control Agreement (Triangulum Partners, LLC shares) | 8-K | 000-30653 | 99.1 | September 27, 2017 |
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10.29 |
| 8-K | 000-30653 | 10.1 | April 27, 2018 |
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10.30 |
| 8-K | 000-30653 | 10.1 | February 22, 2019 |
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10.31 |
| Amendment #2 to the Employment Agreement dated May 1, 2017, between the Company and Harry C. Hagerty | 8-K | 000-30653 | 10.2 | February 22, 2019 |
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10.32 |
| 8-K | 000-30653 | 10.1 | April 24, 2019 |
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10.33 |
| 8-K | 000-30653 | 10.1 | May 6, 2019 |
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10.34 |
| Board of Director Service Agreement dated June 3, 2019 with Michael Gavin Isaacs | 8-K | 000-30653 | 10.1 | June 6, 2019 |
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10.35 |
| 8-K | 000-30653 | 10.1 | August 28, 2019 |
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10.36 |
| 8-K | 000-30653 | 10.1 | February 19, 2020 |
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10.37 |
| 8-K | 000-30653 | 10.3 | October 15, 2019 |
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10.38 |
| 8-K | 000-30653 | 10.2 | February 26, 2020 |
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10.39 |
| 8-K | 000-30653 |
| April 21, 2020 |
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10.40 |
| 8-K | 000-30653 | 10.1 | August 14, 2020 |
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10.41 |
| 8-K | 000-30653 | 10.1 | August 24, 2020 |
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41
Exhibit Number |
| Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
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10.42 |
| 8-K | 000-30653 | 10.3 | November 4, 2020 |
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10.43 |
| 8-K | 000-30653 | 10.2 | November 4, 2020 |
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10.44 |
| 8-K | 000-30653 | 10.1 | November 17, 2020 |
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23.1
23.2
31.1 |
| Consent of Moss Adams LLP, Independent Registered Public Accounting Firm |
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| X
X
X |
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31.2 |
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| X | |
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32.1 |
|
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| X | |
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|
101 |
| Financials in XBRL format |
|
|
|
| X |
SIGNATURES
In accordance with Section 13 or 15(d)Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GALAXY GAMING, INC.
Date: |
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| ||
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| By: |
| /s/ TODD P. CRAVENS |
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| Todd P. Cravens |
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| President and Chief Executive Officer |
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| (Principal Executive Officer) |
Date: |
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| ||
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| ||
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| By: |
| /s/ HARRY C. HAGERTY |
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| Harry C. Hagerty |
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| Chief Financial Officer |
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| (Principal Financial Officer) |
4142
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature |
| Title |
| Date |
/s/ TODD P. CRAVENS |
| President and Chief Executive Officer |
|
|
Todd P. Cravens |
| (Principal Executive Officer) |
| |
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|
/s/ HARRY C. HAGERTY |
| Chief Financial Officer |
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Harry C. Hagerty |
| (Principal Financial Officer) |
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|
/s/ MARK A. LIPPARELLI |
| Chairman of the Board of Directors |
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Mark A. Lipparelli
/s/ |
| Director |
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/s/ |
|
| ||
|
| Director |
|
|
William A. Zender
/s/ BRYAN W. WATERS |
| Director |
|
|
Bryan W. Waters |
|
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|
4243